Some 3.1 million people could be nudged into paying higher or additional rate tax by the 2027/28 tax year due to the government’s frozen income tax thresholds, according to data from HMRC.
A freedom of information request filed by Quilter revealed 2.7 million people aged 60 and above are on pace to be brought into the higher rate of income tax in the next five years, while nearly half a million will be brought into the additional rate.
It means around one in five of people over the age of 60 in the UK will be “dragged” into paying more tax.
Jon Greer, head of retirement policy at Quilter, said: “The number of pensioners likely to pay higher and additional rates of income tax as a result of frozen thresholds is set to increase exponentially by 2028, and not only will this boost government coffers by stealth, but it looks likely that other tax increases are on the cards.
“With the Labour government’s first Budget now just over two months away, it is vital that people are managing their finances tax efficiently to help reduce their overall burden.”
Indeed, chancellor Rachel Reeves has confirmed that tax increases are on the cards for October’s Budget, although income tax rates are not on the agenda. Still, a threshold increase is unlikely, meaning that people will effectively pay more.
Those nearing retirement or semi-retired and still working should look to maximise their pension contributions whenever possible, said Greer, as this can help to avoid those close to the edge from tipping over into a higher income tax bracket. It can also help to save on childcare, as Trustnet explored earlier this week.
Topping up a pension is especially beneficial for higher-rate taxpayers, as they can currently receive up to 40% tax relief on contributions but will often only pay the basic rate of 20% when the money is withdrawn later down the line.
“Each tax year, most people up to the age of 75 can earn tax relief on pension contributions and make up to 100% of their earnings with total tax-relieved contributions limited by a £60,000 annual allowance,” Greer said.
“You can also carry forward any unused annual allowance from the previous three tax years. However, if you have already accessed your pension then you will be subject to the money purchase annual allowance (MPAA) limit of £10,000 per tax year.”
For those already withdrawing from their pension, he noted that it is important to only take as much money as is needed – the less you withdraw, the less income tax is payable.
“Similarly, it is important to remember how much pension income you will have including your state pension income, as it is also taxable,” he said.
Others may have reached state pension age but do not wish to retire. In this case, they have the option to defer the state pension. If you reach state pension age on or after 6 April 2016, for every nine weeks deferred, the state pension increases by 1%.
“While this can be a good option for those who are still working and do not yet require their state pension funds, it is important to remember that the additional amount is then paid with your regular state pension payment and could be subject to tax,” finished Greer.