A recent study indicates that approximately ten million pensioners could be required to pay income tax by the end of the decade if the freeze on tax thresholds continues until 2030. The current personal allowance, which allows most individuals to earn £12,570 annually before income tax kicks in, has remained stagnant since the 2021/22 tax year.
Although the freeze is anticipated to conclude by the 2028/29 tax year, there are speculations that Rachel Reeves might prolong it until 2030. According to findings by former pensions minister Steve Webb, in collaboration with LCP, extending the freeze for an additional two years could result in an additional 500,000 state pensioners becoming liable to pay income tax.
It is estimated that at least 9.3 million pensioners will be subject to taxation, accounting for about three-quarters of all pensioners, compared to the current 8.7 million. However, LCP suggests that this number could escalate to ten million pensioners paying income tax by the decade’s end if inflation or wage growth accelerates in the forthcoming years.
The state pension undergoes an annual increase in April, following the highest of earnings growth from May to July, September inflation rate, or a minimum of 2.5%. The new state pension is projected to rise from £230.25 to £241.30 per week in April 2026, aligned with a 4.8% wage growth, with exact figures to be disclosed in the upcoming Budget announcement.
When the freeze was initiated in 2021/22, the new state pension was roughly 75% of the tax threshold. By 2027/28, even with a 2.5% triple lock rise in the state pension, LCP forecasts the new state pension to surpass the tax threshold by 102%.
Steve Webb from LCP remarked, “A combination of high inflation and frozen tax thresholds has led to a surge in the number of pensioners paying tax, and in the numbers paying at 40% or above. If the Chancellor decides to freeze thresholds for another two years, we will see at least half a million more pensioners dragged into the tax net as a minimum, taking the total to around 9.3 million – three quarters of all pensioners.”
He added, “But if inflation or wage growth picks up, that total could reach 10 million pensioner taxpayers by the end of the decade. The majority of today’s pensioners retired under the old state pension system and around 2.5 million of them already have a state pension above the income tax threshold.”
