Wealthy over-85s hit hardest by pension tax trap

Britain's oldest pensioners are bearing the brunt of a stealth tax raid that is forcing hundreds of thousands to hand back a chunk of their hard-earned state pension to the taxman.

Shocking new figures show that nearly half of retirees aged 85 and over are now paying income tax on their state pension - more than twice the rate of their younger counterparts.

The grab is the result of a freeze in tax thresholds first introduced by Rishi Sunak when he was Chancellor in 2021 and continued by Rachel Reeves through to 2028.

Analysis reveals that 46% of people aged 85 to 89 now exceed the personal tax-free allowance of £12,570, with 45% of those aged 90 and over also being caught. This compares with just 22% of pensioners under 85 who face the same tax burden.

The figures have sparked concern that the Government is penalising the most vulnerable - older retirees, many in declining health and with limited savings - by allowing a so-called "retirement tax" to bite deeper every year.

The freeze on income tax thresholds, brought in by Mr Sunak in 2022, means that any rise in income - including the state pension - pushes more people into the tax net. That freeze is set to remain in place until 2028, turning what was once a tax-free retirement benefit into a taxable liability for millions.

The impact of this tax trap has been intensified by the state pension triple lock, which raises payments each year by inflation, wage growth or 2.5% - whichever is highest. As a result, growing numbers of retirees are being dragged over the threshold and into the hands of the taxman.

According to an analysis of Department for Work and Pensions (DWP) figures, 307,000 of the 677,000 people aged 90 or over now receive more than £12,570 a year in state pension - equivalent to 45.4%. In contrast, only 12.1% of pensioners aged 65 to 69 fall into the same category.

And for the very oldest, the bills are even higher. Among those aged 80 and over, 6.1% now pay at least £1,000 in income tax solely on their state pension - compared to just 1.3% of those aged 65 to 79.

The complexity of Britain's pension system means many over-80s are receiving state pensions above the tax threshold due to entitlements built up under the pre-2016 "old" system, which included the basic state pension and an earnings-linked top-up known as Serps.

The "basic" pension is currently £9,175.40 a year - significantly lower than the new state pension, which has just risen to £11,973. But many older pensioners still receive substantial Serps top-ups, taking them over the threshold.

Steve Webb, a former pensions minister, now with consultancy LCP, told the : "It is often forgotten that the old state pension was made up of two parts - a largely flat-rate basic pension and an earnings-related pension on top, which could add significantly to the amount you received.

"People whose pension comes mainly from the state rather than a workplace pension can easily find their total state pension takes them into the income tax bracket.

"Those on the new system are mostly under the tax threshold, but this will change dramatically at some point in the next two years when the standard new pension goes over the tax threshold.

"At this point most new state pensioners will be taxpayers, regardless of any other income."

The looming squeeze could see anyone receiving the full new state pension being taxed by April 2027, unless the Government lifts the threshold.

Caroline Abrahams, charity director at Age UK, said: "People in this age group are much more likely to be in ill-health and also to find their savings have dwindled over the years, compared to others who have only recently retired.

"The disproportionately adverse impact on the oldest people in our society is another reason why the Government should now increase the personal allowance, rather than keeping it frozen year on year."

Baroness Ros Altmann, also a former pensions minister, warned that the tax burden could push many frail pensioners into financial difficulty and confusion.

"The oldest pensioners now in their 80s or 90s will be the ones likely to have most Serps, which can give a large extra payment on top of the old basic state pension.

"While it is still the case that nearly half of the oldest citizens do not yet pay tax on their state pension income, if their state pension increases while the tax threshold stays frozen, then more may be dragged into the tax net.

"The most elderly may be unable to cope with tax returns, leaving them vulnerable to fines or penalties for failing to pay small amounts of tax."

A spokesman for the Treasury insisted support was in place: "We are committed to helping our pensioners live their lives with dignity and respect, which is why we have frozen fuel duty and increased the state pension to leave pensioner couples up to £88 better off a month.

"Our commitment to the triple lock means millions will see their pension rise by up to £1,900 this parliament."