A recent study indicates that if the freeze on tax thresholds continues until 2030, approximately ten million pensioners could be pushed into the bracket of paying income tax by the end of the decade. The current personal allowance, which allows individuals to earn £12,570 per tax year before being subject to income tax, has remained stagnant since the 2021/22 tax year.
Although the freeze on the personal allowance is slated to end in the 2028/29 tax year, there are speculations that Rachel Reeves might extend it until 2030. According to findings by former pensions minister Steve Webb, in collaboration with LCP, an extension of the freeze for two more years could result in an additional half a million state pensioners becoming liable to pay income tax.
LCP predicts that the number of pensioners paying income tax could escalate to ten million by the decade’s conclusion if inflation or wage growth accelerates in the forthcoming years. The state pension undergoes an annual increase in April through the triple lock mechanism, which considers the highest of earnings growth between May to July, inflation in September, or a minimum of 2.5%.
Anticipated figures suggest that the new state pension will rise from £230.25 to £241.30 weekly in April 2026, reflecting a 4.8% wage growth. By 2027/28, even with a 2.5% increase under the triple lock, the new state pension is projected to surpass the tax threshold by 102%.
Steve Webb from LCP remarked that the combination of frozen tax thresholds and high inflation has resulted in a surge in pensioners liable to pay tax, some even at the 40% tax rate. Should the freeze be prolonged for another two years, an additional half a million pensioners could potentially be affected, totaling around 9.3 million, comprising three quarters of all pensioners.
Moreover, the number of pensioners above the income tax threshold is expected to rise. Fortunately, most affected pensioners will not have to file tax returns as the tax will likely be collected through their private pensions or the ‘simple assessment’ process conducted by HMRC.