Chancellor urged to review tax and pension thresholds in mini-Budget

Industry experts have called on the Chancellor to review the long-term freeze on income tax allowances in his upcoming mini-Budget, after industry analysis raised concerns that over half a million pensioners could be “dragged” into the income tax net for the first time.

Research from LCP found that increases in the state pension, alongside frozen income tax thresholds, saw the number of over 65s paying tax rise by 390,000 over the past year.

It also warned that with a much larger pension increase expected in April 2023 amid rising inflation, a much bigger increase in the number of over 65s paying tax is expected, estimating that at least half a million over 65s will be brought into the income tax net as a result.

LCP partner, Steve Webb, commented: “Freezing tax thresholds is a stealthy way of raising tax at the best of times, but at a time of soaring inflation, freezing thresholds has a profound effect.

"During this Parliament we have already seen over a million extra pensioners dragged into the tax net, and next April’s increase is likely to add at least half a million more.

“If the Chancellor is looking for ways to cut taxes and ease cost of living pressures on those on modest incomes, he could do worse than review the long-term freeze of income tax allowances”.

This was echoed by Aegon pensions director, Steven Cameron, who argued that while the freeze might have gone “largely unnoticed during a period of low inflation..., the impact is now very significant”.

“More individuals are paying income tax on a greater proportion of their salary and in some cases being dragged into paying higher rate tax,” he continued.

“Receipts from income tax provide the biggest source of revenue for the Exchequer but soaring inflation is making it extremely hard to justify keeping the freeze until 2026. Doing so would mean taxing people more, exacerbating the cost-of-living crisis.

“If not feasible to increase the thresholds immediately after the mini-Budget, we are calling for plans to be announced to do so from April 2023.”

Cameron argued that the Chancellor should also review the pensions lifetime allowance, which has been frozen at its 2020/21 level of £1,073,100 until 2026, warning that if left unchanged, it could cause “real and long-term damage to the UK pension system and the retirement livelihoods of thousands”.

In addition to this, he raised concerns over the money purchase annual allowance (MPAA), arguing that the pandemic and cost-of-living crisis have "highlighted the unsuitability of the £4,000 limit for the current world of work and economic situation".

"Over 55s may have dipped into their pension for financial support during the pandemic and cost-of-living crisis without knowing this comes with a sting in the tail if they then want to rebuild their pension by making future pensions contributions," he explained.

“We’d urge the government to increase the MPAA to ensure people who have been adversely affected by the pandemic and cost of living crisis are not left disadvantaged in their ability to rebuild their pension savings.

"Increasing the MPAA limit to at least £10,000 would go some way to help those individuals whose retirement plans have been thrown into disarray since the beginning of the pandemic.”

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