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Two million more pensioners will pay income tax under Jeremy Hunt

Jeremy Hunt - HANNAH MCKAY/REUTERS
Jeremy Hunt - HANNAH MCKAY/REUTERS

Two million more pensioners will be forced to pay income tax in retirement in the Government's latest stealth tax raid.

Chancellor Jeremy Hunt is expected to announce a deep freeze on tax thresholds in the Autumn Statement next week as he looks to raise £50bn for the Treasury.

Mr Hunt will likely confirm that the state pension triple lock will stay in place – handing a 10.1pc increase to retirees.

Analysis for the Telegraph has revealed that the combination of a triple lock boost and an extended freeze on the personal tax allowance will mean a total of nine million pensioners have to pay income tax, up 29pc from the current total of seven million.

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Two in three pensioners will be required to pay income tax.

The triple lock promises to increase the state pension every April in line with the highest of the previous September’s inflation rate, wage growth or 2.5pc. If the triple lock is upheld, it will mean the annual state pension for recent retirees will rise to over £10,000.

After doubts over whether or not the Tory manifesto pledge was affordable, work and pensions secretary Mel Stride today signalled that the Government would stick to its promise when he said “pensioners are absolutely at the forefront of the group that we want to really protect as much as we can through these difficult times”.

Watch: Is a UK state pension enough to survive on in retirement?

But analysis by pensions consultancy LCP has revealed that a triple lock boost will push nearly half a million retirees over the personal tax allowance, which is frozen at £12,570 until 2026 and is expected to remain at that level until 2028 under the Autumn Statement plans.

Since the December 2019 election, more than one million over 65s have been dragged into paying income tax, according to Government figures. A total of seven million currently pay income tax.

The rise in older taxpayers is down to a phenomenon known as “fiscal drag”, where inflation and income growth push earners into higher tax brackets.

The total number of tax-paying pensioners will rise to nine million if the income tax thresholds remain frozen until 2028, LCP estimated.

More than 12 million people currently collect the state pension, but an estimated 13.4 million will do so by 2028, LCP said.

Sir Steve Webb, of LCP and a former pensions minister, said: “Over a million pensioners have been brought into the tax net since the last general election and more could be forced to pay tax for the first time if the existing allowance freeze is extended again.

“This is a backdoor way of raising tax, and has an arbitrary impact because the rate of inflation in future is not known. The current freeze has turned out to be much more brutal than expected because of the surge in inflation which has happened in the last year.”

An extension of the lifetime allowance freeze also threatens to punish wealthier pension savers. The lifetime allowance is frozen at £1.073m until 2026 but this newspaper understands the Government will also extend this until 2028.

Sir Steve said: “If the freeze is extended further, we could easily have two million people in the workforce having to start to think about capping their pension saving in order to avoid tax charges.”

A two-year extension would force pensioners to hand over an extra £400m in tax, analysis by wealth manager Quilter suggested.

A Treasury spokesman said: “We’re committed to protecting low income households which is why we have increased the personal allowance by over 40pc in real terms since 2010, excluding the lowest earners from paying income tax altogether.

“Moreover, our income tax system is highly progressive with the top 50pc of income taxpayers expected to pay around 92pc of total income tax this year, while the bottom 25pc are expected to pay just 2pc.”