A recent study indicates that if the freeze on tax thresholds continues until 2030, around ten million pensioners could be impacted by having to pay income tax by the end of the decade. Typically, individuals can earn up to £12,570 per tax year before being subject to income tax, known as the personal allowance, which has remained static since the 2021/22 tax year.
Although the freeze is currently set to conclude in the 2028/29 tax year, there are discussions led by Rachel Reeves to potentially extend it until 2030. According to findings by former pensions minister and LCP partner Steve Webb, extending the freeze for two more years could result in an additional half a million state pensioners falling into the income tax bracket.
It is estimated that around 9.3 million pensioners, approximately three-quarters of all pensioners, could be affected if the freeze is extended. This figure could potentially rise to ten million pensioners paying income tax by the end of the decade if inflation or wage growth accelerates in the coming years.
The state pension is subject to the triple lock, ensuring an annual increase based on the highest of earnings growth between May to July, inflation in September, or a minimum of 2.5%. The full new state pension is projected to rise from £230.25 to £241.30 per week in April 2026, reflecting a 4.8% wage increase. Further details are anticipated to be disclosed in the upcoming Budget.
The gap between the new state pension and the tax threshold has been narrowing, with projections indicating that by 2027/28, the new state pension could surpass the tax threshold by 102%. Steve Webb of LCP emphasized that a combination of frozen tax thresholds and high inflation has led to a significant increase in pensioners paying taxes.
While most affected pensioners may not need to file tax returns, any taxes owed are likely to be managed through tax codes on private pensions or the ‘simple assessment’ process, streamlining the tax collection process.