Almost two-thirds of pensioners will be taxed at the same 40% rate as millionaires under proposals the government aims to introduce in 2003.
Under the proposed ‘pensioner tax credit’ – currently under consultation until April – some 60% of pensioners would be charged at the high marginal rate of income tax.
When introduced, the credit would work along similar lines in principle as the working families tax credit introduced in October 1999, and will affect an estimated 6.5 million pensioners.
Similarities in the two systems include both offering a credit that is tapered away as income increases.
Pensioner tax credit will aim to help lower income pensioners but will drastically increase the number of UK residents who have to pay the 40% rate. The calculations for the credit will combine with the minimum income guarantee.
However, no pensioner is expected to be worse off under the proposal.
The proposals of the pension system were set out in a DSS consultation document published earlier this month, while the chancellor Gordon Brown announced the proposals in the recent pre-Budget report.
The income guarantee is already in place and guarantees pensioners a minimum income from their pension by boosting their state pension to a set figure – currently £78.45 a week for a single pensioner.
The new credit will allow pensioners whose income does not exceed the guarantee, to claim 60p in every #1 a week of additional income earned which exceeds the state pension – producing the 40% tax effect. Additional income could include money from an occupational pension or part-time work.
It is understood it will cost the government £2bn to introduce the new system while pensioners wishing to apply for the credit will have to fill out a 42-page return.
Maurice Fitzpatrick, Chantrey Vellacott tax partner, said: ‘The effect of the new rules will be to create a situation where around three in every five pensioners face an effective marginal rate of tax of 40%.’
Carl Emmerson, a senior research economist studying pensions at the Institute of Fiscal Studies, added: ‘The 40% rate will actually be higher in some cases, but it is still an improvement on the one in five pensioners who have to pay a 100% withdrawal rate under the current system.’
A DSS spokesman said: ‘The government is trying to give a reward for pensioners with savings.’
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