A recent study reveals that approximately ten million retirees may be pushed into the bracket of income tax payers by the end of the decade if the freeze on tax thresholds continues until 2030. The current threshold allows individuals to earn £12,570 annually before they are liable to pay income tax, a level that has remained unchanged since the 2021/22 tax year.
Although the freeze is expected to conclude by the 2028/29 tax year, there are speculations that Rachel Reeves might extend this freeze until 2030. Research conducted by former pensions minister and LCP partner, Steve Webb, indicates that extending the freeze for an additional two years could result in an extra 500,000 state pensioners being subject to income tax.
It is projected that at least 9.3 million pensioners will be paying income tax, which accounts for roughly three quarters of all pensioners, compared to the current figure of around 8.7 million individuals. LCP suggests 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.
The state pension is set to rise annually in April based on the highest of earnings growth between May to July, September inflation, or a fixed rate of 2.5%. The full new state pension is anticipated to climb from £230.25 per week to £241.30 per week in April 2026, reflecting a 4.8% increase in wages. Details regarding this adjustment are expected to be disclosed in the Budget.
When the freeze commenced in the 2021/22 tax year, the new state pension was approximately 75% of the tax threshold. However, by 2027/28, even with a modest 2.5% increase under the triple lock mechanism, the new state pension is forecasted to surpass the tax threshold by 102%.
Steve Webb from pension consultants LCP expressed concerns about the impact of high inflation and stagnant tax thresholds on pensioners, emphasizing that an extension of the freeze could drag an additional half a million pensioners into the tax system. He noted that by 2027/28, most pensioners, including those under the old state pension system, would likely surpass the income tax threshold.
Fortunately, many of these pensioners will not be required to file a tax return as any owed taxes will typically be collected through their private pensions or via a simplified assessment process conducted by HMRC utilizing existing data to calculate tax liabilities.