The tax trap catching thousands of working pensioners
Thousands of working pensioners found themselves ensnared in the income tax trap last year, as frozen thresholds yanked them into the higher tax bracket.
According to a freedom of information request to HMRC by Interactive Investor, 77,000 pensioners found themselves paying 60 per cent income tax, up from just 34,000 three years ago.
It was also a 13 per cent jump from the 2023/24 financial year where 68,000 people were slapped with the hefty tax bill.
High earner…but not wealthy
More pensioners have found themselves being subjected to the tax, despite not considering themselves wealthy.
Rising inflation has caused employers to consistently boost wages in recent years, but the Treasury has continued to ignore calls to modify the threshold to match the economic conditions.
The threshold has been held at £100,000 since its introduction in April 2010.
The tax sees individuals earning over £100,000 pay 60 per cent tax on a portion of their income, with the £12,570 tax free personal allowance gradually being withdrawn once the amount is exceeded.
This means for every £2 of income a person earns over £100,000, their tax-free personal allowance is reduced by £1.
Craig Rickman, pensions expert at Interactive Investor, said: “This data reveals the punishing impact of the 60 per cent tax trap on older workers, as frozen tax thresholds pull more pensioners’ incomes into six-figure territories.”
“If the tax-trap threshold had kept pace with inflation, workers would now be able to earn £155,000 before being hit with 60% income tax.
“With the deep freeze on income tax bands set to endure until 2028/29, and fears the government could extend it even further, thousands more people above state pension age will be hit with punitive rates of tax on some of their income.”
Beating the trap
However, contributing to a pension can reduce the likelihood of being subjected to inheritance tax, by bringing incomes back below the threshold.
Rickman said: “Paying into a pension to bring your income below £100,000 can attract 40% income tax relief and enable you to keep your personal tax-free allowance.
“Just don’t forget to include the pension contribution on your tax return if it goes into a private pension, like a SIPP, as you only receive the 20% basic-rate relief upfront.