Up to 900,000 retirees could be taxed on their state pension income this year, according to Government figures. Marriage Allowance recipients may be slapped with the levy due to significant hikes to the triple lock and frozen tax allowances. Low income households who use the Marriage Allowance to share their personal tax allowance with their partner will be primarily affected.
In a Freedom of Information (FOI) request made by LCP, published by The Sun, 40 per cent of Marriage Allowance claimants are over 65 years old. This is the equivalent of nearly 900,000 pensioners, who risk paying tax on their state pension for the first time. Through Marriage Allowance, a low-income partner can transfer 10 per cent of their personal tax allowance, which is worth £1,260 to their husband or wife if they have it spare. This benefit could save the couple up to £252 in tax annually.
Pensioners are at risk of being hit by an ‘unwelcome’ tax bill
Previously, the personal tax allowance has increased every year in line with inflation and earnings which means the state pension has always been around 90 per cent less than the £1,260 threshold.
However, tax thresholds including the personal tax allowance have been frozen at the same rate since April 2021.
Chancellor Jeremy Hunt confirmed that tax thresholds would remain frozen until 2028 as the Government attempts to generate more money without directly raising taxes.
As a consequence of this, wage increases resulting from inflation are pulling people into higher tax brackets.
Concurrently, the state pension triple lock has remained in place with pensioners in line for a 8.5 per cent rate rise this year, after receiving a 10.1 hike last April.
As such, anyone getting the state pension who is passing the remaining allowance to their spouse could be taxed in retirement for the first time.
This is because 90 per cent of the personal tax allowance comes to £11,313, however the state pension will increase to more than £11,500 in April this year.
If a spouse continued to gift 10 per cent of their personal allowance to their partner, they would exceed the personal allowance thresholds.
Jeremy Hunt’s decision to freeze tax allowances is having ‘side effects’ on older people
If the spouse choose not to use the Marriage Allowance benefit, they would pay an extra £252 a year.
Former Pensions Minister and partner at LCP Steve Webb described this tax dilemma for pensioners as “one of the unwelcome side-effects” of frozen tax allowances and highlighted that, as women are more likely to claim Marriage Allowance, many married women will now be slapped with tax bills in retirement.
He explained: “They now have to make a rather messy choice between claiming back their tax allowance and increasing their husband’s tax bill, or getting an annual tax demand from HMRC.
“This could all be solved if the Government ended the stealthy squeeze on family finances created by repeatedly freezing the tax-free allowance”.