Pensioners Stealth Tax – Its Impact, Who will pay and how does it work?

The UK government had hiked the state pension by 8.5 percent, which could drag them to pay income tax bills under the Government’s Stealth tax freeze. Let’s discuss the pensioner’s Stealth tax and how they can pay taxes. 

Pensioners Stealth Tax

Stealth tax somehow increased the tax burden for citizens which mostly goes unnoticed by the general public. The government would make less noticeable changes or make no changes at all. Since 2021, the income threshold has been frozen and later on, extended to 2028.

The extended freezing of the income threshold could drag you to a higher tax bracket with any rise in your income. 

Recently, the UK government has announced a raise in state pensions by £692 under the triple-lock state pensions which they raise every year. 

This year, the government raised the basic state pension keeping the pace with a wage growth rate of 8.5%. This implies that pensioners would receive an annual total of £8,814 pension from the government. 

But, with this hike, Jeremy Hunt’s stealth tax would make pensioners’ pension a taxable income. According to the reports, the stealth tax freeze would vanish three-quarters of today’s increase in the pension income of retirees.

Stealth tax Impact on the Pensioners

The Stealth tax can drag the pensioners into the taxable bracket with the triple lock basic state pension increment. 

The new pension will be paid to pensioners from 8 April 2024 who have reached the pension age after 2016 will make the pension amount £11,502.40 in a year. 

The personal allowance is frozen at £12,570 till 2028, making the pensioners closer to the personal allowance limit, which could lead to many pensioners paying taxes to the government for the very first time. 

According to the report of the House of Commons Library, the new pension receivers may have to pay 77% of the increase in the pension in taxes due to the freezing of personal allowance.

According to reports, without the freeze in income threshold, the allowance would have hiked to  £15,220 this year, making it no problem for pensioners. 

According to the Department for Work and Pensions, this year around 12.7 million pensioners will receive the state pension and according to the analysis done by IFS, 60% of them will pay taxes now. 

According to the reports, in the coming years around 1.6 million pensioners would pay taxes to the UK government under the Stealth tax as the pension would increase on an annual basis under the triple lock pledge. 

Who will pay taxes on the pension?

According to the announcement, the pensioners receiving a new pension amount to £11,502.40 a year, don’t have to pay any tax on this income as the personal allowance limit is £12,570 till 2028. 

So, you can enjoy the benefit till you cross the personal allowance limit of  £12,570. 

However, the pensioners whose basic state pension exceeds the  £12,570 mark will have to pay the tax on the pension amount. The pensioners whose workplace pension or private pension pushed them over the personal allowance mark would have to pay the taxes with a current hike in state pension. 

But there is a way in which the tax is levied that could save you from the stealth tax. According to experts, the government cannot directly deduct the taxes from your processed state pensions.

How does tax work for pensioners?

The pensioners who receive more than  £240 in a week would pay taxes but as mentioned earlier, the tax would not be deducted by the government directly. 

The pensioners pay taxes to the government through a code applied to private pensions received from workplace pensions or any other means and recognized as PAYE income.

Unlike state pensions, private pensions are taxed through the PAYE system, so with the hike in state pensions, your private pension can decrease slightly. So, your tax would be automatically adjusted from the PAYE system. 

Now, for people who do not receive private pensions or depend on state pensions, their taxes would be collected differently. 

According to HMRC, a simple assessment will be issued for the tax collection, where HMRC will issue a bill at the end of the tax year. 

So, it will be on pensioners to keep the money aside from their pension payments for the tax returns. 

The hike in basic state pension has increased the problems of many pensioners due to the stealth tax. Many experts believe that the pensioners should have a better deal than this. 

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