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Million pensioners dragged into new tax trap this year – expert issues warning | Personal Finance | Finance

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Almost a million pensioners will find themselves dragged into the tax trap for the first time this year, new analysis warns.

Almost 900,000 over 65s – the majority of them women – could face unexpected tax bills as a result of the frozen tax thresholds and the rising State Pension. The pensioners most at risk are those claiming the Marriage Allowance.

Former pensions minister Sir Steve Webb, now a partner at pension consultants LCP, said: “For millions of pensioners, one of the attractions of retirement has been no longer having to deal with HM Revenue & Customs.

“But that has all changed as millions more pensioners have been dragged into the tax net since the government began freezing tax thresholds.

“People who are by no means well off can find themselves having to deal with the hassle of the tax system and are having tax deducted from their pensions, often for the first time.

“Far too many pensioners are now finding themselves in the tax net as a result of the long-term and stealthy freeze on tax-free personal allowances and this cannot continue”.

The tax-free personal allowance stands at £12,570 but for those claiming the marriage allowance, this rises to £13,830. The spouse, usually the wife, transfers 10 per cent of her personal allowance to the other partner to qualify for the tax break.

But from April the higher State pension of £11,502 is paid. And this is higher than the £11,310 reduced personal allowance they have leaving them liable to a tax bill. Official figures show how more pensioners of all circumstances have been dragged into the tax trap.

In the 2015 to 2016 tax year, 6,490 people aged 65-plus paid tax. This year, 2023 to 2024, it is expected to increase to 8,500 pensioners. Ken James, of Contractor Mortgage Services, said: “This will drive many elderly people ever deeper into poverty and despair.

“The fact that many have not experienced having to pay these taxes before will put an extreme amount of pressure on already fragile finances.

“How is it possible that in a society where there is plenty of wealth, we struggle to support the elderly who have to make jaw dropping choices such as to heat or eat.”

The current state pension is around £10,600 a year which is set to rise to £11,502 from April after a successful Daily Express campaign to keep the pensions triple lock in place.

In a ‘traditional’ couple, the wife might be a non-taxpayer and she could sign over an unused 10 per cent of her personal allowance to her husband. It did not cost her anything but it saved him 20 per cent of the transfer, which was over £250 per year.

That’s fine when she has 10 per cent of her allowance to spare. But now with frozen thresholds and record increases year on year in the value of the state pension, some of these women now have taxable income within 10 per cent of the personal allowance.

For example, the 2024/25 rate of the new state pension is a whisker over £11,500 per year which is 91.5 per cent of the tax threshold. So a woman who continues to sign over her 10 per cent now gets a tax bill.

Adam Pope, of tax lawyers Spencer Churchill, said: “This year, up to 900,000 retirees, particularly those benefiting from the marriage allowance, might find themselves paying taxes on their state pensions for the first time.

“This is a direct consequence of the substantial rise in state pensions and the freezing of tax thresholds. It’s a significant change.

“With the new state pension potentially pushing you over the personal allowance limit, you might face unexpected tax liabilities.

“It’s important to calculate if continuing to transfer part of your allowance to your spouse remains beneficial under these new conditions.

“With the recent pension increases and the freeze in tax thresholds, a substantial number of our elderly population are entering a new financial landscape.”

The latest government figures suggest that around 2.1m couples benefited from the Marriage Allowance in 2020-21, and just over one in three of these are estimated to be pensioner couples.

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