Britons are being urged by analysts to defer accessing their state pension payments to offset a looming “stealth tax” resulting from fiscal drag.
According to recent HM Revenue and Customs (HMRC) obtained by wealth management firm Quilter, nearly 32 million people will impacted by this phenomenon by 2027-28.
Fiscal drag occurs when tax thresholds remain frozen while incomes rise which results in Britons being pulled into higher tax brackets.
Tax thresholds have been frozen since 2021-22 and will remain at current levels until 2028-29, creating a seven-year stretch of fiscal stagnation.
Analysts are suggesting Britons “postpone state pensions” to bolster their income
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Nearly 18 million people will be dragged into the tax net for the first time due to this “stealth tax” with a further 12 million Britons will start paying the higher 40 per cent. tax rate.
Furthermore, around two million more Britons will trip above the 45 per cent threshold, which kicks in when earnings exceed £125,140.
For those approaching retirement age, around eight million in this group are set to start paying tax for the first time are over the age of 60.
This demographic largely consists of individuals who have retired from work and are living off their existing accumulated wealth.
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Britons are being dragged into higher tax brackets due to fiscal drag GETTY Analysts note that fiscal drag has been popular for policymakers as it allows them to avoid the inevitable backlash that would accompany raising headline tax rates.
As well as this, it has become lucrative for the Treasury. Office for Budget Responsibility (OBR) figures show that freezing tax thresholds will raise £42.9billion by 2027-28.
This substantial sum is roughly double what the government currently collects from inheritance tax and capital gains tax combined.
For those facing this tax squeeze, financial experts are highlighting the strategies those approaching retirement should consider to sidestep this tax hike.
Craig Rickman, personal finance editor at interactive investor, suggests one option for older citizens which could impact their state pension.
“You can postpone your state pension and there can be financial advantages to doing so,” Rickman said.
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Older britons are concerned about the rising tax burden
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He explains that deferring increases the amount by one per cent for every nine weeks, totalling 5.8 per cent annually.
“Given the current full state amount, this could equate to an extra £694.43 in 12 months’ time,” Rickman notes.
“This approach might suit those who are still receiving a working income, which could result in a large portion of their state pension being swallowed up in tax.
“However, you do need to watch out here, as you would forfeit a year’s state pension payment, which unless you live for around a couple of decades, could mean you were better off claiming it as soon as you could.”
