Chancellor creates new 53% tax rate for around 200,000 low-income pensioners

The Chancellor has today announced a new tax break for those whose state pension and other taxable income is above the tax threshold (£12,570), but below the new state pension rate (£13,037 in 2027/28).  The maximum value of the break is around £94 in 2027/28.  For those just above this income level, the tax break will be reduced at a rate of £1 taken away for every £3 of income above £13,037.  For those on £13,319 or above, the tax break will therefore be reduced to zero.

However, this means that for pensioners in the range £13,037 to £13,319, they will face an effective tax rate of 53%.

This is made up of:

• 20% basic rate income tax PLUS
• Loss of tax break at £1 per £3 of extra income or 33%

Commenting, Steve Webb, partner at pension consultants LCP said: 

“The Chancellor has created a bizarre 53% income tax rate for around 200,000 low income pensioners.  They will find that each £100 of annual private pension they have built up above the rate of the new state pension will add £53 to their income tax bill.  We are used to seeing high rates of income tax like this for top earners but not for those on very modest incomes.  Yet again, complexity has been introduced to the tax system to fix a short-term problem but with no long-term solution in mind”