29 February 2024
If you are covering the latest HMRC personal incomes statistics, please see the following comment from Jon Greer, head of retirement policy at Quilter:
“HMRC’s latest personal income statistics reveal there were 6.74 million taxpayers of state pension age for the tax year 2021 to 2022, an increase of 4.3% compared to the previous tax year, and this figure has likely grown considerably in the years since.
“At the time, the full new state pension was £179.60 per week, or £9,339.20 per year, using 74% of the £12,570 personal allowance. Since then, however, the personal allowance has remained frozen at the same level, while the state pension has risen substantially.
“The state pension will soon reach £221.20 per week or £11,502.40 per year in the 2024/25 tax year, leaving just over £1,000 of the personal allowance. This will no doubt see a considerable number of pensioners who have additional retirement income dragged into paying tax.
“What’s more, the reality is that we are soon set to be in the perverse situation where pensioners might have to start paying back their state pension to HMRC because of frozen allowances, and our previous analysis found that pensioners could need to pay back a proportion of their state pension in income tax in just two years’ time.
“The triple lock increases the state pension by the higher of average earnings, inflation as measured by CPI or 2.5%. Due to the way the triple lock operates, if inflation or wage growth are over 4% for the next two tax years the government will need to start asking for some of its pension benefit back in tax unless it increases the personal allowance.
“Given that state pensions will shortly eradicate someone’s personal allowance any private pension provision other than the tax-free cash lump sum will therefore become taxable at their highest marginal rate. For many that could mean big tax bills depending on how much they drawdown.
“Pensioners are often worst hit by frozen tax allowances because they typically will be getting their income from a number of different investments and therefore lean heavily on CGT and dividend allowances to help create a retirement income in addition to their pension.
“However, the government has made it very difficult to avert being taxed very heavily on these types of investments. It is incredibly important that people look across the spectrum of financial products that provide tax efficiency and use them in the right way and at the right time to try to prevent their income being eroded by tax. Seeking professional financial advice can help someone make the most of their finances as current fiscal policy now mandates a different approach to financial planning.”
