Stealth tax raid on 1.6m pensioners

As many as 9.3 million older people will be paying income tax by 2028
As many as 9.3 million older people will be paying income tax by 2028 - iStockphoto

Up to 1.6 million more pensioners will be paying income tax within four years as a result of Conservative stealth raids, new analysis has revealed.

As many as 9.3 million older people will be paying the tax by 2028 after the Government froze the threshold at which people start to pay.

Currently, 8.5 million pensioners pay income tax – but analysis by the House of Commons Library has found that the frozen threshold means an extra 1.6 million will pay the tax than would have done if the threshold had risen along with inflation since 2021.

That means around an extra 850,000 pensioners paying income tax in 2028 than this year, taking the number to 9.35 million – the highest on record. In 2010, when the Tories came to power, 4.9 million paid income tax.

On Monday night, the Liberal Democrats, who commissioned the research, said voters would punish the Conservatives at the ballot box.

Sarah Olney, the party’s Treasury spokeswoman, said: “These stark figures reveal the stealth tax bombshell facing pensioners under this Conservative government. Older people who have worked hard and contributed all their lives are now being clobbered with years of unfair tax hikes.

“Jeremy Hunt’s pensioner-punishing Budget will not be forgotten come the next election. The Conservative Party faces a reckoning from older voters sick of being taken for granted.”

The revelation comes as pensioners were hit in the pocket because they did not benefit from National Insurance cuts in the last two Budgets.

Older voters, who are more likely to see the reduction of immigration as a priority, have recently been turning away from the party over Mr Sunak’s failure to deal with the small boats, leading to a large swing towards Reform UK among pensioners.

Half of landlords are over 55, and many may lose out under Michael Gove’s decision to strip tax relief from owners of short-term lets.

The threshold at which people start to pay income tax was frozen at £12,570 by Rishi Sunak in 2021, and the freeze was extended to the end of 2028 by Mr Hunt.

It means that every year, more and more older people are having to pay the levy as their income from the state pension and private pensions increases along with inflation – known as fiscal drag. Without the freeze, the allowance would have risen to £15,220 in 2024/25 and up to £15,990 in 2027/28.

According to the Institute for Fiscal Studies (IFS), well over 60 per cent of over-65s now pay income tax, up from around 50 per cent in 2010.

The House of Commons Library research showed that this total will increase still further over the next four years. It found that, in this financial year, up to 1.2 million more pensioners will pay income tax than if the threshold had been increased along with prices since 2021. By 2027/28, this total will have risen to between 1.4 million and 1.6 million.

Baroness Altmann, a former Tory pensions minister, said: “I do think it is worrying that so many more pensioners could be dragged into the tax net as the state pension may soon rise above the frozen threshold.

“Most of those tipped into tax will be poorer pensioners with little more than their state pension to live on. Most of them will be totally unaware of any liability and will never have filled in a tax return in their life. They are then at risk of being hit with fines and penalties for not paying a tiny amount of tax that they didn’t even know about.”

On Monday, it emerged that bosses at HM Revenue & Customs were afraid that its customer service helpline would be overwhelmed because of the millions of people being hit by stealth taxes.

Last year, the IFS said 650,000 extra pensioners would be dragged into paying income tax because of the combination of an 8.5 per cent rise in the state pension and the threshold freeze. The full state pension for 2024/25 is £11,502 a year.

The Commons Library analysis showed that the number of people due to be dragged in to paying tax in future years is of a much larger scale than previously thought.

It calculated the number of additional taxpayers compared with a situation in which the personal allowance increased by the CPI rate of inflation, the default policy before Mr Sunak and Mr Hunt changed it.

Its research said the estimates were “fairly approximate” and calculated using a policy simulation tool called Ukmod, which uses Office for Budget Responsibility forecasts of household income in future years.

John O’Connell, the chief executive of the TaxPayers’ Alliance, said: “Taxpayers young and old are being hammered by frozen thresholds. Ministers must use every opportunity available to them to give relief to households.”

A Treasury spokesman defended the decision to freeze tax thresholds, saying: “After providing hundreds of billions of pounds to protect lives and livelihoods throughout the pandemic and Putin’s energy shock, we had to take some difficult decisions to help pay it back.

“Now the economy is turning a corner, we have cut National Insurance by a third, meaning that, coupled with above-inflation increases to personal tax thresholds since 2010, we have saved the average earner over £1,500 compared to what they otherwise would have paid.”