Retired households face tax shock from frozen allowances

Millions more could start paying tax or pay a higher rate tax from April due to frozen personal allowance.

Retired people already contribute more than £57.22 billion a year in direct taxes.

Retired households are facing a potential tax shock this year as frozen personal allowance kicks in from April with hundreds of thousands facing higher bills.

Our analysis* shows the average bill for direct taxes is £4,961 annually for retired households with the total direct tax taken from them adding up to more than £57.22 billion.

However, the Government decision to freeze Personal Allowances – the amount people can earn before paying tax – and Higher Rate tax allowances could mean hundreds of thousands of pensioners seeing their tax bill rise or paying tax for the first time.

Pensioners on lower incomes face two potential issues – the 10.1% rise in the State Pension due in April taking the annual amount to £10,600 could push those with small pensions into paying tax as the Personal Allowance has been frozen at £12,570.

Those on higher incomes face the same issue as Higher Rate tax thresholds have been frozen at £50,270 and need to be careful about taking pension lump sums.

Currently around 7.7 million taxpayers are aged over 65 including those who still work. The number paying tax has increased 43% in the past 10 years and currently around 770,000 pay higher rate tax.

Most recent Government data shows the average gross income of retired households comes in at £32,265 with benefits including the State Pension accounting for 41% of total income. Income from private pensions accounts for 43% of gross income. Income tax on private pensions costs them around £3,359 on average.

iSIPP Managing Director Hrishi Kulkarni said: “The number of over-65s paying income tax has been steadily rising over the past 10 years but April this year is likely to see another sharp increase.

“A combination of frozen personal allowance and the rise in the State Pension will mean many people with private pensions will face increased tax bills with some paying tax for the first time.

“It is important people budget for the potential tax bills particularly given the cost-of-living squeeze and also that where possible they maximise tax-free savings. Tax in retirement is increasingly inevitable so maintaining contributions to private pensions and ensuring fees on funds are minimised by consolidating funds where possible is important for people of all ages.”

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* The Effects of Taxes and Benefits on Household Income, UK, 2020/21 – Reference Tables and HMRC data on tax paid by over-65s released under Freedom of Information

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