Pensioners Targeted in Major Tax Shake-Up
The UK's tax authority, HMRC, is preparing to send letters to state pensioners demanding payment of what amounts to a 63% tax rate on their income. This dramatic move comes as the Labour Party Chancellor, Rachel Reeves, considers implementing a 2p income tax increase for higher earners in the upcoming Autumn Budget.
Breaking Election Promises
This potential tax hike would directly contradict Labour's election pledge not to raise taxes on working people. The proposed changes would create a situation where individuals earning between £100,000 and £125,140 face an effective 63% income tax rate, in addition to their 2% National Insurance contributions.
The situation presents a particular challenge for pensioners, who would face a significant financial hit despite not paying National Insurance after reaching state pension age. Unlike workers, pensioners are exempt from National Insurance but remain liable for income tax, meaning the full impact of any income tax increase falls directly on their retirement income.
Experts Warn of System Worsening
Shaun Moore, tax and financial planning expert at Quilter, has voiced serious concerns about the proposals. He warned that the changes would make "a perverse part of our tax system even worse" and create an even greater tax burden on an already penalised group of workers.
Mr Moore highlighted the particular challenge facing those earning around £100,000, noting that "many will not necessarily feel rich, but such a move will see the Government consider them to be." This comes at a time when tax thresholds remain frozen, effectively increasing the tax burden through fiscal drag.
The controversy extends beyond income tax, with reports suggesting Ms Reeves plans to limit tax breaks on pension contributions. This could potentially stop savers from increasing their retirement pots and create long-term pressure on the state pension system.
Financial experts have warned that many employers might reduce their pension contributions if the Chancellor proceeds with plans to reduce the tax breaks available to both employers and employees. The proposed measures, which could raise up to £2 billion annually, would involve applying a £2,000 annual limit on the amount of salary that can be sacrificed into pensions.
All eyes are now on the Chancellor as she prepares to deliver her Autumn Budget on November 26, where these critical tax decisions will be formally announced.
