New analysis shows that Rishi Sunak’s stealthy tax raid could hit up to 900,00 pensioners next year with a unexpected income tax bill.
The six-year tax threshold freeze by the Prime Minister will make it necessary for hundreds of thousands retirees who claim a married couple tax break to pay an additional levy.
Marriage allowance allows one half of a married couple to transfer 10%, or £1,260, of the personal tax-free allowance they receive to the other. This can save them up to £252 per year, provided that the other partner is a basic tax payer.
According to HMRC, around 40pc or 900000 of the 2,28m people currently claiming the relief are pensioners.
The tax-free threshold has been frozen at £12 570 since 2021. This means that the relief offered has not kept up with the large increases in state pension.
From April, the new flat-rate pension will increase by 8.5pc and reach £11502 per year. It will now be worth over 90pc of personal allowance or £11313, leaving couples with a tax bill of £39.
If the thresholds are not raised, the tax breaks that were introduced just 10 years ago will be void.
Two former ministers of pensions urged Chancellor Jeremy Hunt do more to protect a rising number of retirees against being hit with tax bills.
Sir Steve Webb was the pensions minister from 2010 to 2015. He said that the large increases in state pensions coupled with the freezing of tax allowances have pushed a lot of pensioners in the tax net.
Sir Steve, who is now a partner with consultants LCP added: “Extra complications arise for 900,000. Pensioners using the Marriage Allowance, as many need to decide whether or not to stop sharing their tax allowance once they become taxpayers themselves.”
He noted that many of these pensioners would receive the basic state pension which is less generous, but he also said: “HMRC estimates over 8m pensioners are going to pay tax this and next year. That’s a majority of pensioners.”
Former Prime Minister David Cameron introduced the marriage allowance in 2015 when state pensions were far behind personal income tax allowances.
The gap has been closed by several years of large cash increases , backed by the triple-lock, which ensures that annual payments increase by the highest of the pay, price or 2.5pc.
HMRC is under pressure already after 1m people missed the self-assessment due date of January 31. Many complained about 40-minute waiting times. Fiscal drag has forced thousands to file their first tax return due to wage increases and frozen tax bands.
Baroness Ros Altermann, who replaced Sir Steve as Pensions Minister in 2015, warned that many over-65s would be surprised by a HMRC demand next year.
“The problem is that many people won’t be aware of the fact that they may need to pay tax, and they wont learn about it quickly. They will eventually get a bill.
What I would like to see HMRC and Department for Work and Pensions connect the dots is that they are connected. If there is only a small amount of tax to pay, the payment is made automatically.
“That is not money that pensioners have lying around. Especially those who only rely on the state pension. There is a problem. “We need to increase the tax threshold in order to ensure that those who do not live on large, generous pensions are not faced with the complexity of paying tax.”
Sir Steve said: “Pensioners with modest incomes should not have to deal with the tax office in retirement.” The Government should carefully consider raising the tax starting point to ensure that pensioners who have limited resources do not face annual tax bills.
Treasury spokesperson said: “Pensioners who receive the state pension as their sole source of income and have not deferred payments or received protected payments pay no income tax. This year, we gave the largest cash increase ever to pension payments – a 10.1pc increase.”
Fiscal drag has already hit workers. The Office for Budget Responsibility predicted in November last year that an extra three million workers would be dragged to the 40p income tax rate over the next five-year period as the thresholds remain frozen.
This means that for the first ever, the tax system will capture 4 million workers with relatively low incomes.
Treasury spokesperson said that “our tax burden is lower than any other major European economy. And by increasing personal thresholds, we have removed 3 million people from paying tax.”