Personal allowance freeze sees pensioners in 40% or 45% tax double | Personal Finance | Finance

The number of pensioners paying a 40% or 45% additional rate of income tax has just passed the one million mark, according to HMRC data obtained through a Freedom of Information Act request by pension consultancy LCP. This figure has doubled in the last four years since the personal allowance threshold was frozen, it said.

However, it’s not just an income tax bill that retirees need to be on the lookout for. Being pushed into higher tax brackets will also affect the amount they can earn on savings and investments. Pensioners with retirement annuities, buy-to-let portfolios and savings outside of tax-free accounts like ISAs could be particularly affected.

The personal allowance threshold allows people to take home £12,570 before paying income tax on their earnings.

Over this threshold you pay 20% income tax until you hit £50,270 when your tax rate jumps to the higher rater of 40% and at £125,140 you’ll hit the additional tax rate of 45%.

But this isn’t the only thing that changes when you jump tax brackets.

At the basic rate, you’re allowed to earn £1,000 of interest on your savings each year before paying tax on it unless it’s in special tax-free accounts like ISAs.

At the higher rate, this drops to £500 and at the additional rate all of your savings interest may be taxed at your income tax rate.

For investments, on dividends over £500 basic rate taxpayers pay 8.75% tax, higher rate taxpayers owe 33.75% and additional rate taxpayers pay 39.35%.

Former pensions minister Steve Webb, now a partner at pensions consultancy LCP, previously said: “There has been a significant increase in the number of pensioners paying income tax at all rates, but the rise has been greatest in the numbers paying income tax at the higher rates.

“This has more than doubled from under half a million four years ago to over a million now. Not only does this mean more tax on things like income from state and company pensions, it also means these pensioners are paying more tax on their savings, as their personal savings allowance is cut, and a higher rate of capital gains tax – a ‘triple whammy’.

“The higher rate threshold has become a real cliff-edge over which growing numbers of pensioners are falling.”

With the rising number of pensioners in the higher and additional tax rate brackets, they will also potentially be facing tax bills from their savings and investments too.

With the state pension alone now sitting at around £11,973 a year, many retirees are facing unexpected tax bills and being pushed up tax brackets as time goes on, despite not withdrawing more than normal from their pension.

Additionally, the most recent Retirement Living Standards report says a single person will need £43,100 per year for a comfortable retirement, putting them incredibly close to the higher rate threshold.