Ten million retired individuals may face the obligation to pay income tax by the end of the decade if the current freeze on tax thresholds is prolonged until 2030, according to recent research findings.
Typically, individuals can earn up to £12,570 per tax year before becoming liable for income tax, known as the personal allowance, which has remained fixed at this level since the 2021/22 tax year.
While the freeze is scheduled to conclude in the 2028/29 tax year, there are indications that Rachel Reeves could potentially extend it until 2030. Analysis by former pensions minister Steve Webb, now a partner at LCP, reveals that extending the freeze for an additional two years could result in an extra 500,000 state pensioners being subject to income tax.
The number of pensioners paying tax would rise to at least 9.3 million, representing approximately three-quarters of all pensioners, compared to the current figure of around 8.7 million. LCP projects that this figure 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 undergoes an annual increase every April based on the highest among earnings growth between May to July, inflation in September, or a minimum of 2.5%. The full new state pension is anticipated to rise from £230.25 to £241.30 per week in April 2026, aligned with a 4.8% wage growth, with specific details expected to be disclosed in the Budget.
When the freeze commenced in 2021/22, the new state pension represented roughly 75% of the tax threshold. However, by 2027/28, even with a modest 2.5% triple lock increase in the state pension, LCP estimates that the new state pension will 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.”
Webb also noted, “From 2027/28, anyone on the full rate of the new state pension will also be above the tax threshold based on their state pension alone. The one bit of good news is that most of these pensioners will not need to fill in a tax return. Any tax due will usually be collected via a tax code on their private pension or through the ‘simple assessment’ process which involves HMRC using information it already holds to work out a tax bill.”