George Osborne, who was chancellor at the time, reversed a century-old tax break introduced by Winston Churchill: an age-related allowance used to let pensioners start paying tax at a higher income level than workers. Mr Osborne scrapped it in his second Budget, in a move that was condemned as an assault on retirees.
Persistent tax raids on pensioners’ wealth comes despite wide inequalities within the age group: although this generation is more likely to own property compared with their children and grandchildren, most have relatively modest incomes to fund their day to day lives.
A freedom of information request last year found that nine out of 10 pensioners who pay income tax do so at the basic rate of 20pc. Yet even those on modest incomes have been forced to hand over more in tax over the past decade – a pensioner earning £25,000 each year would pay £2,093 in 2010/11, according to analysis by the IFS. In the 2024/25 tax year, this will be £2,486.
Yet so far pensioners have been left out of tax cuts – at the Autumn Statement last year, a widely expected income tax cut was ditched in favour of a reduction in National Insurance rates. While this saved the average worker £450 in a year, it did nothing for those over the state pension age, who no longer have to pay towards NI.
All this is set against a system that easily, and often, overtaxes private pensions. Since pension freedoms were announced in 2015, pensioners have had to reclaim £1.2bn in overtaxation – clawing back £3,200 each on average from the tax office.
This is because under an emergency tax code, HMRC treats a saver’s first pension withdrawal as if it were going to happen each month. It therefore divides the saver’s personal allowance of £12,570 by 12, and then assesses the excess against 1/12th of each of the income tax bands.
It means a £50,000 single withdrawal would lead to a tax bill of almost £21,000, if this were a saver’s only earnings subject to income tax. If this were taxed on an ordinary basis, the bill would be just £7,486.
The true overtaxation figure is likely to be substantially higher, as those on lower incomes who are less familiar with the self-assessment process are not as likely to challenge the tax office on the bill.
A government spokesman said: “Pensioners whose sole income is the new state pension and who have not deferred or receive protected payments do not pay any income tax, and this year we provided the biggest ever cash increase to pension payments, a 10.1pc rise.
“Our tax burden remains lower than any major European economy – and by increases to personal thresholds since 2010 we will have taken three million people out of paying tax altogether.”