Up to 9.3million pensioners could end up paying tax if Reeves’ Budget tax raid goes ahead.
In her Autumn Budget next week, the Chancellor is expected to extend the freeze on income tax thresholds to 2030.
However, this means when your pay rises, more of it can be taxed at higher rates even though the bands do not change – an effect known as fiscal drag.
And it’s not only workers who are affected, retirees also end up paying tax on their state pension.
New figures by crunched by former pensions minister Steve Webb reveal a total of 9.3million retirees could end up paying tax on their state pension if income tax thresholds are frozen for another two years.
It means around three quarters of all pensioners would be taxed, compared with around 8.7million today.
That’s because under the triple lock, the full state pension is set to rise by 4.8% to £241.30 per week from April.
The rise equates to £12,534.60 a year, pushing pensioners dangerously close to the £12,570 income tax threshold.
But if inflation or wage growth picks up in the coming years, leading to larger state pension rises, Steve said we could see 10million pensioners paying income tax by the end of the decade.
The new state pension is expected to increase to just over £240 a week, with Reeves due to announce the hike in her Budget later this week.
Many pensioners already pay tax on their state pension due to additional top-ups and extra payments.
Steve Webb, partner at pension consultants LCP said the majority of today’s pensioners retired under the old state pension system and around 2.5million of them already have a state pension above the income tax threshold.
He added: “But from 2027/28, anyone on the full rate of the new state pension will also be above the tax threshold based on their state pension alone.
“The one bit of good news is that most of these pensioners will not need to fill in a tax return.
“Any tax due will usually be collected via a tax code on their private pensions or through the ‘simple assessment’ process which involves HMRC using information it already holds to work out a tax bill”
How can I protect myself from paying tax?
There are a number of measures you can take to mitigate the amount of tax you have to pay.
One way is to take advantage of all the tax-free incentives on offer.
For example, make sure to put any savings into an ISA. These savings vehicles let you deposit up to £20,000 per year, and any interest or returns you earn are tax-free.
And it is not just the interest you earn on them that is tax-free, but any withdrawals too.
For example, withdrawing 4% a year from a £100,000 ISA pot in retirement would amount to £4,000 of tax-free income each year, compared to taking it out of a regular savings account, which is subject to tax.
This could also be a good time to take advantage of pension savings.
You can save money into a pension tax-free, and any money saved into your retirement pots then has the opportunity to grow tax-free over time.
You can then withdraw up to 25% of your pot tax-free when you reach retirement age.
You can either do this as a lump sum or in smaller gradual amounts to top up your state pension without being taxed on it.
How does the state pension work?
AT the moment the current state pension is paid to both men and women from age 66 – but it’s due to rise to 67 by 2028 and 68 by 2046.
The state pension is a recurring payment from the government most Brits start getting when they reach State Pension age.
But not everyone gets the same amount, and you are awarded depending on your National Insurance record.
For most pensioners, it forms only part of their retirement income, as they could have other pots from a workplace pension, earning and savings.
The new state pension is based on people’s National Insurance records.
Workers must have 35 qualifying years of National Insurance to get the maximum amount of the new state pension.
You earn National Insurance qualifying years through work, or by getting credits, for instance when you are looking after children and claiming child benefit.
If you have gaps, you can top up your record by paying in voluntary National Insurance contributions.
To get the old, full basic state pension, you will need 30 years of contributions or credits.
You will need at least 10 years on your NI record to get any state pension.
