How the Tories’ 14-year tax raid is finally being laid bare

Rishi Sunak Tax

The number of pensioners paying income tax has risen by 42pc since the Tories came to power, as the true cost of the Government’s stealth tax raid is laid bare.

Data published on Thursday by HM Revenue and Customs (HMRC) shows that the number of people over pension age paying income tax is expected to hit a record 8.5 million in 2024-25 – a rise of 660,000 year-on-year.

It means that during the Tories’ 14 years in office, an extra 2.5 million pensioners have been dragged into the tax net.

The figures come after the prime minister warned that Sir Keir Starmer was planning a “retirement tax” during Wednesday’s televised leaders’ debate.

The Liberal Democrats have seized upon the figures, accusing Rishi Sunak of “hammering” pensioners with his own retirement tax through the deep freeze on tax thresholds.

Sarah Olney, Liberal Democrat Treasury spokesman, said: “The Conservative party have forced the elderly and hardworking families to pick up the tab for their disastrous management of the economy.”

HMRC estimates that nearly 2 million people have been dragged into the higher rate of income tax since Mr Sunak froze thresholds in 2021.

Meanwhile, the number of 45pc tax payers is this year expected to surpass 1 million for the first time.

This is because of fiscal drag, where people end up paying higher rates of tax as wages rise while bands remain unchanged.

The Tories have repeatedly tried to paint Labour as the tax-raising party. They also unveiled £17bn worth of tax cuts in their recent manifesto.

But HMRC’s figures show that there are 4.4 million more taxpayers compared to 2021 because of the Government’s stealth tax raid.

Both Labour and the Tories have voiced their intentions to honour the deep freeze on tax thresholds if they win the election.

Here, Telegraph Money outlines all the different ways the Conservatives have increased taxes for the country since they were voted in in 2010.

Pensioners

Since 2021-22, the number of pensioners paying income tax has surged by almost 2 million.

This is because more and more pensioners are choosing to work in retirement to cover living costs, while the Government has decided not to uprate tax bands with inflation.

The state pension rises every year with the highest out of inflation, wage growth or 2.5pc.

This pledge – called the triple lock – has pushed annual state pension payments up to £11,500.

However, the threshold at which people start paying income tax is stuck at £12,570 until 2028, dragging hundreds of thousands of low-income retirees into the net.

To tackle the growing number of taxpaying pensioners, the Conservatives have promised to introduce a “triple lock plus” if they remain in power.

This would see pensioners’ personal allowance rise in line with the triple lock each year. Announcing the policy, Mr Sunak vowed that the state pension “would never be taxed” under the Tories.

But Labour has refused to match the pledge. Mr Sunak used this as ammunition in Wednesday’s TV debate, arguing that Sir Keir would inflict tax rises on pensioners.

“If you’re a pensioner, you should know there’s a retirement tax coming for you, Capital R, Capital T,” he said. “If [Starmer] is your prime minister, for the first time in our country’s history, pensioners are going to be paying tax because he won’t match our triple lock plus.”

Steve Webb, former pensions minister and now partner of consultancy LCP, said: “These new figures from HMRC are very timely and help to inform the debate about pensioners and tax.

“They show that a combination of frozen tax thresholds and significant increases in the state pension means the number of pensioners paying tax has continued to soar. But this is a continuation of a long-term trend which has seen the number of over-65s paying tax rise by around four million since 2010-11.

“For a pensioner in Britain, being an income taxpayer is now the norm rather than the exception.”

Higher rate taxpayers

The number of higher rate taxpayers is forecast to hit 6.3 million in the 2024-25 tax year, up from 6 million in 2023-24.

This is double the number caught in the 40pc band compared to 2010 when David Cameron became prime minister.

Meanwhile, the number paying the top 45pc rate has ballooned to 1.1 million, almost double the 520,000 in 2021-22.

The Government cut the additional rate threshold from £150,000 to £125,140 in 2023, bringing hundreds of thousands into the top tax bracket.

Overall, there are 6.3 million 40pc taxpayers in Britain. The majority – 2.26 million – are concentrated in London and the South East.

Nimesh Shah, of accountancy firm Blick Rothenberg, said: “The more recent freezing of allowances and tax thresholds has had an exponential effect – the impact is only going to get worse as three million people will be pulled into the higher and additional rates of income tax over the next five years as wages rise.”

According to the Office for Budget Responsibility, fiscal drag will yield the Government £174bn by the end of the next Parliament.

Even with the Conservatives’ recent National Insurance cuts, the total rise in tax receipts will still be worth £71.7bn, Mr Shah said.

Savers

This year people are expected to pay a record-breaking £10.3bn in tax on their savings, rising by about £1bn year-on-year.

The tax-take on people’s savings has leapt up from a mere £1.64bn when the personal savings allowances were first introduced.

Since 2016, basic rate taxpayers have been able to earn up to £1,000 in interest on savings before having to pay tax at their marginal rate. This drops to £500 for higher rate taxpayers and to £0 for additional rate taxpayers.

Yet these thresholds have remained unchanged even as interest rates have shot up – meaning the amount people can earn in interest without paying tax has reduced dramatically.

Today, higher earners will face a tax hit with as little as £10,001 stashed in a savings account paying 5pc.

Investors

The Government’s tax raid has also extended to income investors and company directors who are expected to pay £17.83bn in dividend tax this year, up by over a quarter (27pc) in just two years.

The huge surge has been triggered by successive cuts to the tax-free allowance. Two years ago, investors could earn up to £2,000 in dividends before paying tax. But the Conservatives have since slashed this to just £500.

The impact of these cuts has been exacerbated by the freeze on tax thresholds. As more people cross into higher tax bands, they also pay dividend tax at higher rates of 33.75pc or 39.35pc, compared to 8.75pc for basic rate taxpayers.

Laura Suter, of stockbroker AJ Bell, said: “The Government has launched a triple assault on investors and company directors recently. The move to cut the tax-free dividend allowance from £2,000 down to £500 over the past couple of tax years means more people are paying dividend tax.

“But alongside this the freeze on income tax bands means that more people are being pushed into the next tax band, and so paying a higher rate of dividend tax.”