Ten million retirees may face the burden of income tax by the end of the decade if the freeze on tax thresholds continues until 2030, according to new research findings.
The current personal allowance allows individuals to earn £12,570 per tax year before income tax kicks in, remaining static at this level since the 2021/22 tax year.
While the freeze is scheduled to conclude by the 2028/29 tax year, there are speculations that Rachel Reeves might consider extending it until 2030.
A study by former pensions minister Steve Webb, who is now a partner at LCP, indicates that an additional half a million state pension recipients would be subject to income tax if the Chancellor opts for a further two-year extension on the freeze.
By the end of the decade, at least 9.3 million retirees could be liable to pay taxes, representing around three-quarters of all pensioners, compared to the current figure of approximately 8.7 million.
LCP warns that this number could escalate to ten million pensioners paying income tax by the end of the decade if inflation or wage growth accelerates in the upcoming years.
Under the triple lock mechanism, the state pension is adjusted annually in April, aligning with the highest of earnings growth from May to July, September’s inflation rate, or a minimum of 2.5%.
Anticipated details suggest that the full new state pension will rise from £230.25 per week to £241.30 per week in April 2026, reflecting a 4.8% wage increase, with the official announcement expected during the Budget.
When the freeze commenced in 2021/22, the new state pension amounted to roughly three-quarters of the tax threshold. However, by 2027/28, even with a modest 2.5% rise under the triple lock, the new state pension is projected to surpass the tax threshold by 102%, as per LCP’s analysis.
Steve Webb from LCP commented, “A combination of stagnant tax thresholds and high inflation has resulted in a surge of pensioners liable for tax payments, including those falling under the 40% tax bracket.”
“Should the Chancellor decide on a two-year extension of the threshold freeze, we anticipate a minimum of half a million more pensioners being affected, bringing the total to around 9.3 million – encompassing three-quarters of all retirees,” Webb added.
Webb further noted that if inflation or wage growth accelerates, the number of pensioners paying taxes could surge to 10 million by the decade’s end. Most pensioners today retired under the old state pension system, with around 2.5 million already having state pensions exceeding the income tax threshold.
He continued, “From 2027/28, individuals receiving the full new state pension will surpass the tax threshold based solely on their pension entitlement.”
“The silver lining is that the majority of these pensioners will not need to file tax returns, as any tax owed is typically collected via their private pensions or through HMRC’s ‘simple assessment’ process, utilizing existing data to calculate tax liabilities,” Webb explained.