Recent research indicates that up to ten million retirees may become liable to pay income tax by the end of the decade if the freeze on tax thresholds is extended until 2030.
Individuals are typically allowed to earn £12,570 per tax year before being subject to income tax, known as the personal allowance, which has remained stagnant since the 2021/22 tax year.
While the freeze is currently projected to conclude in the 2028/29 tax year, there are speculations that this freeze may be prolonged until 2030 by Rachel Reeves.
According to analysis by former pensions minister Steve Webb, another two years of frozen income tax thresholds could result in an additional 500,000 state pensioners being obligated to pay income tax.
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Consequently, around 9.3 million pensioners could be paying taxes, representing about three-quarters of all pensioners, compared to the current 8.7 million individuals.
LCP suggests that this number may escalate to ten million pensioners paying income tax by the conclusion of the decade if inflation or wage growth accelerates in the following years.
The state pension undergoes an annual increment every April, based on the highest percentage among earnings growth between May and July, inflation in September, or 2.5%.
It is anticipated that the full new state pension will rise from £230.25 per week to £241.30 per week in April 2026, reflecting a 4.8% wage growth, with the official announcement expected in the Budget.
When the freeze commenced in 2021/22, the new state pension equated to approximately 75% of the tax threshold. However, by 2027/28, even with a mere 2.5% triple lock increase in the state pension, it is projected that the new state pension will surpass the tax threshold by 102%.
LCP’s Steve Webb expressed concerns, stating, “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.”
He added, “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.”
Webb further highlighted that the total number of pensioners subject to taxation could reach 10 million by the end of the decade if inflation or wage growth accelerates. Notably, most current pensioners retired under the old state pension system, with around 2.5 million already receiving a state pension exceeding the income tax threshold.
He reassured, “The good news is that most of these pensioners will not need to file a tax return. Typically, any owed taxes will be collected through a tax code on their private pensions or via the ‘simple assessment’ process utilizing existing HMRC data to calculate tax liabilities.”