Pensioners set to be hit by Chancellor’s stealth tax raid

Millions of pensioners will be forced to fill in an annual HMRC return for the first time within three years due to the Chancellor’s multi-billion stealth tax raid, according to an analysis by The Mail on Sunday.

Older people are likely to be dragged into the tax net even if they have no income other than a full state pension.

This is due to so-called ‘fiscal drag’. Jeremy Hunt has frozen personal allowances and thresholds for several years, pulling more people into the tax net and higher rate bands. 

Due to higher-than-expected inflation, this has resulted in a far bigger haul than anticipated. The number of pensioners who have been caught in the income tax net is already set to hit a record 8.5 million this year – up from 4.5 million in 2010.

The Chancellor is expected in this week’s Budget to keep the personal allowance – the point at which people start paying income tax – pegged at £12,570 until 2028. He is also committed to the ‘triple lock’, which guarantees that the state pension will rise each April in line with the highest of either the previous September’s inflation rate, earnings growth or a rate of 2.5 per cent. 

The full pension rises next month in line with inflation of 8.5 per cent to £11,501 a year. Price rises have since slowed to 4 per cent and wage growth to 6 per cent. 

But even if earnings growth fell to 5 per cent a year, our analysis shows the state pension would exceed the personal allowance in 2027, triggering a 20 per cent tax charge on the difference. That would also mean millions of unsuspecting pensioners facing the daunting prospect of filling out an annual tax return – even for a tiny amount owed – or being fined if they miss the deadline. 

Jason Hollands of wealth manager Evelyn Partners said while pension rises were welcome, if pensioners’ incomes were dragged into the tax system they could end up worse off in real terms. When the freezes were introduced by Rishi Sunak as Chancellor in 2022 they were expected to raise £8 billion. Now the figure is £43 billion by 2027-28.

The Office for Budget Responsibility says frozen thresholds are the biggest contributor to the rising tax burden on the economy. This will be at a post-war high of 37.7 per cent of output by 2028, it estimates.

The stealth raid is, however, vital to Hunt meeting his goal for debt to fall as a percentage of economic output by that time.

Pushpin Singh at the Centre for Economics and Business Research said unfreezing allowances in the Budget would hit public finances by more than £50 billion but this could be clawed back via efficiency savings.