Rob Morgan, chief investment analyst at Charles Stanley, has called on Ms Reeves to act.
State pensioners face an “odd” bill from HMRC thanks to frozen tax thresholds – with Labour Party Chancellor Rachel Reeves being urged to make a change. Rob Morgan, chief investment analyst at Charles Stanley, has called on Ms Reeves to act.
Discussing frozen tax thresholds which are affecting those of state pension age, so born before 1959, Mr Morgan said: “With the latest figures for wages at around 5% it is highly likely this element will be the relevant one for next April, and with the current level of a full new state pension at around £11,975 for the 2025/26 tax year a rise at that order will take it beyond the £12,570 income tax personal allowance.
“That would mean a pensioner relying on the standard state pension alone for their retirement income having to pay tax on a small part of it.” “Chancellor Rachel Reeves may have ruled out tax rises in her Spending Review today but the long-term freeze on income tax thresholds remains firmly in place.
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This means more people are going to find themselves with a higher tax burden – a result of fiscal drag, where people effectively get ‘dragged’ into paying higher rates of tax as their salary increases. As a result, real returns net of tax may only be marginally positive on the most competitive savings accounts, particularly for taxpayers in the higher income tax bands.
Mr Morgan said: “As well as being administratively messy in terms of dragging an unprecedented number of low-income pensioners into paying tax, it seems odd that this level of income should be taxed at all.
“According to the Pension and Lifetime Savings Association, a single person in retirement needs £14,400 a year for a ‘minimum’ standard of living, a figure which is after tax and assumes no mortgage or rent costs.
“This figure is significantly below where the income tax personal allowance would be if it had been increased with inflation, clearly demonstrating how low earners have suffered from fiscal drag too.”
Rates are likely to ease back in the months ahead so securing a top deal now will prolong the amount of time a saver receives an inflation-beating return. Remember, the Personal Savings Allowance has not budged since it was first introduced in 2016 so storing too much cash in a regular bank or building society account may flag the interest of the tax office.
