Pensioners warned of ‘stealth tax’ that could come as ‘nasty shock’ for those on fixed inc | Personal Finance | Finance
Stuart Wilson, chairman of Air Club, warned the state pension increasing by 10.1 percent will push many pensioners into paying more tax. The basic state pension has increased to £156.20 a week while the full new state pension is £203.85 a week.
With the personal allowance frozen at £12,570, a person on the full new state pension will start paying tax once they earn another £1,969.80 on top of their state pension.
Mr Wilson said: “Arguably, the biggest stealth tax is the freezing of the personal allowance at £12,570 until 2028.
“With pensioners enjoying a 10.1 percent state pension increase this year, those with even a modest income from their private or workplace retirement savings are going to find that they will now need to pay tax.
“It won’t be a huge amount but for someone on a fixed income, this will come as a nasty shock.”
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He said another steal tax facing older Britons is how the social care provision rules work. He explained: “Currently, if you have assets worth more than £23,250 in England, you will need to pay for any care that you need.
“The Government reforms which were due to come into effect in October 2023 have been pushed back to 2025 – and there is some scepticism whether we have lost these all together.”
The Government set out reforms in September to reform funding for adult social care in England.
This included providing £3.6billion to help people pay for social care, with £1.4billion of this to go to local authorities so they could allocate a “fair cost of care” to providers.
The funding was to come from the Health and Social Care Levy on National Insurance, but this was scrapped in September 2022. The reforms have now been delayed until October 2025.
Mr Wilson said of the potential extra costs in income tax and social care for pensioners: “Unfortunately, neither of these tax liabilities are easily mitigated and if you do try to reduce your assets to manage your care costs, this is classed as deliberate deprivation and you could be charged.”
He said one way pensioners can plan ahead to reduce their tax liability is to look at how much inheritance tax their estate will be subject to.
He said investing funds in pensions is a good way to do this, saying: “Untouched defined contribution pension pots can be left tax-free so you may want to consider looking at other assets such as savings or property before touching them.
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“Also, while consolidating your pension pots can make it easier to manage them, this will make it harder to leave something to your beneficiaries so you may want to consider leaving a smaller pot alone.”
People can also reduce their inheritance tax liability by reducing the size of their estate such as by giving away gifts.
A person can give away £3,000 each year divided between any number of persons. On top of this, an individual can give away gifts of up to £250 to any number of people.
Mr Wilson warned pensioners may see prices for several everyday needs go up as inflation remains high, with the latest figure at 10.4 percent.
He said: “While the Chancellor froze fuel duty for a further 12 months and even reduced it by 5p, the spending patterns of older consumers mean that they tend to feel the impact of inflation and VAT on costs such as fuel, utilities and food more than other age groups.
“Duties account for almost 35 percent of the cost of fuel so considering whether a hybrid or electric car may be an option but road tax is due to be introduced on these types of vehicles in 2025 so they are not without their tax considerations.”
Pensioners may also want to check if they can increase their state pension by voluntarily paying National Insurance contributions.
A person typically needs 30 years of contributions to get the full basic state pension and 35 years of contributions to get the full new state pension.
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