Pensioners hit by secret ‘retirement tax’ as they must pay £2,700 extra compared to four years ago

THE cost of a comfortable retirement has soared by £2,700 in just four years due to frozen income tax thresholds and the increasing cost of living.

Pensioners will now need to pay significantly more in income tax to maintain their living standards.

A "comfortable" retirement, as outlined by the Pensions and Lifetime Savings Association (PLSA), is now characterised by an annual income of £43,100 - up from £32,800 in 2020-21.

This level of financial security allows for regular indulgences such as beauty treatments, visits to the theatre, and a two-week European holiday each year.

It also factors in weekly grocery costs of around £70 and £60 for meals out.

Back in 2020-21, a single pensioner pursuing this lifestyle would have faced an income tax bill of £5,058.

However, with the threshold for a comfortable retirement rising by £10,300, pensioners would have been expected to pay £7,787 in income tax for the 2023-24 financial year - a striking 54% increase, according to analysis by The Telegraph.

This surge in tax burden is largely attributed to "fiscal drag," where frozen tax thresholds combined with rising incomes due to rising inflation push more people into higher tax brackets.

While the cost of essential goods and services has increased, the income tax thresholds have remained stagnant since 2020-21 and are projected to stay frozen until at least 2027-28.

Jon Greer, head of retirement policy at Quilter, highlighted that retirees are now facing considerably higher tax bills merely to sustain their existing standard of living.

However, this isn't due to substantial growth in their incomes, but rather because the tax system has failed to keep pace with rising inflation.

He said: "This creeping tax burden risks undermining retirement security for thousands of people who did everything right.

"They saved diligently, planned carefully, and expected a stable system in return.

"Instead, they are being taxed more heavily simply to stand still."

This follows separate analysis published earlier this week, which revealed that frozen tax thresholds are set to force an additional 650,000 state pensioners into paying income tax over the coming year.

This is because state pension payments have gone up, but income tax thresholds remain frozen until 2028, so more people now earn enough to have to pay income tax.

The state pension rises each year under the "triple lock" system, which ensures it increases by whichever is highest: wage growth, 2.5%, or September's inflation rate.

This year, the rise is based on wage growth, resulting in a 4.1% increase.

As a result, the full rate of the new state pension has gone up from £221.20 per week to £230.25, equating to £11,973 annually.

Meanwhile, the basic rate of the old state pension has risen from £169.50 per week to £176.45, totalling £9,175.40 per year.

The personal allowance — the amount you can earn each year without paying tax — remains fixed at £12,570.

If your income exceeds this threshold, you will be required to pay income tax on the amount above £12,570.

Although the new increased state pension headline rates remain below the income tax threshold, 650,000 pensioners will still be liable to pay tax on their state pension due to additional top-ups and extra payments in 2025/26.

For example, people on the old state pension can get extra money from an earnings-related pension, called Serps, which can pay up to £11,356 a year.

Meanwhile, those who choose to delay claiming their state pension can benefit from increased payments, as interest accrues during the deferral period, boosting the overall amount received.

You currently pay no income tax if you earn £12,570 or less.

On earnings between £12,570 and up to £50,270 you pay the basic income tax rate of 20%.

So, if your earnings are £20,000, you pay income tax on £7,429.

Earnings between £50,270 and up to £125,140 are taxed at 40%.

The additional income tax rate, which applies to earnings over £125,140, is 45%.

Income tax thresholds generally rise yearly so that people can earn more without paying more tax.

However, the Government has frozen them in recent years in order to boost its coffers.