Over-85s twice as likely to face ‘retirement tax'
Nearly half of the oldest retirees pay income tax on their state pension, twice the rate of their younger counterparts, analysis shows.
Some 46pc of those aged between 85 and 89 have state pensions that breach the £12,570 tax-free threshold, along with 45pc of retirees aged 90 and over.
By contrast, 22pc of retirees aged under 85 have been hit with a 'retirement tax' on their state pension income.
Experts have warned that the disparity risks penalising society's oldest and most vulnerable citizens amid an ongoing tax raid on pension incomes.
Income tax thresholds have been frozen since 2022 under the Tories and are due to remain so until 2028.
At the same time, the state pension 'triple lock' has pushed up retirees' weekly payments, meaning millions more have been dragged into the tax net, or higher tax brackets. Former prime minister Rishi Sunak dubbed the phenomenon the 'retirement tax'.
Telegraph analysis of Department of Work and Pensions (DWP) data shows that of the roughly 677,000 state pensioners aged 90 or over, 307,000 received more than £12,570 a year, equivalent to 45.4pc.
This was the case for just 336,000 out of 2,771,000 pensioners aged between 65 and 69, or 12.1pc.
Older pensioners were also more likely to incur four-figure tax bills on their state pension income. Some 6.1pc of those aged 80 and over paid at least £1,000 of tax on their state pension income, compared to just 1.3pc of those between 65 and 79.
Most retirees also benefit from a private pension, meaning their tax bills are likely to be considerably higher.
The 'triple lock' – which ensures payments rise each year by the highest of inflation, wage growth or 2.5pc – is expected to push anyone receiving the new 'full' state pension past the £12,570 personal allowance as early as as April 2027.
However, Britain's complex pension system means that around 3.3 million people already receive a state pension above this threshold.
Older pensioners are more likely to have larger state pensions because they accrued more of their entitlements under the 'old' pre-2016 system.
The 'basic' element of the old state pension is currently £9,175.40 a year – nearly £3,000 less than the new state pension, which hit £11,973 this month.
However, the additional earnings-related entitlement of the old state pension, commonly known as Serps, means older retirees have been able to boost their state pensions beyond the tax-free threshold.
Steve Webb, a former pensions minister, now a partner at pension consultants LCP, said: 'It is often forgotten that the old state pension was made up of two parts – a largely flat-rate basic pension and an earnings-related pension on top, which could add significantly to the amount you received.
'People whose pension comes mainly from the state rather than a workplace pension can easily find their total state pension takes them into the income tax bracket.
'Those on the new system are mostly under the tax threshold, but this will change dramatically at some point in the next two years when the standard new pension goes over the tax threshold.
'At this point most new state pensioners will be taxpayers, regardless of any other income.'
Caroline Abrahams, director of charity Age UK, said it was 'intuitively unfair' that the very oldest in society should be taxed most on their state pension.
She added: 'People in this age group are much more likely to be in ill-health and also to find their savings have dwindled over the years, compared to others who have only recently retired.'
'The disproportionately adverse impact on the oldest people in our society is another reason why the Government should now increase the personal allowance, rather than keeping it frozen year on year.'
Baroness Altmann, another former pensions minister, said: 'The oldest pensioners now in their 80s or 90s will be the ones likely to have most Serps, which can give a large extra payment on top of the old basic state pension.
'While it is still the case that nearly half of the oldest citizens do not yet pay tax on their state pension income, if their state pension increases while the tax threshold stays frozen then more may be dragged into the tax net.
'The most elderly may be unable to cope with tax returns leaving them vulnerable to fines or penalties for failing to pay small amounts of tax.'
An HM Treasury spokesman said: 'We are committed to help our pensioners live their lives with dignity and respect, which is why we have frozen fuel duty and increased the state pension to leave pensioner couples up to £88 better off a month. Our commitment to the triple lock means millions will see their pension rise by up to £1,900 this parliament.'
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