A recent study indicates that approximately ten million retirees could find themselves liable for income tax by the end of the decade if the current freeze on tax thresholds is prolonged until 2030. Individuals are usually allowed to earn up to £12,570 per tax year before they are required to pay income tax, known as the personal allowance, which has remained fixed at this level since the 2021/22 tax season. Although the freeze is slated to conclude by the 2028/29 tax year, there are suggestions that Rachel Reeves may push this freeze further to 2030.
Research conducted by former pensions minister and LCP partner Steve Webb reveals that an additional 500,000 state pensioners would be subject to income tax if the freeze on income tax thresholds is prolonged by two more years. This would result in at least 9.3 million pensioners paying taxes, representing approximately three-quarters of all retirees, compared to the current 8.7 million.
LCP warns that the number of pensioners paying income tax could escalate to ten million by the end of the decade should inflation or wage growth accelerate in the upcoming years. The state pension, governed by the triple lock, is anticipated to rise in April each year based on the highest of earnings growth between May and July, inflation in September, or a minimum increase of 2.5%.
By April 2026, the full new state pension is projected to increase from £230.25 to £241.30 per week, aligning with a 4.8% wage growth. As a consequence of the freeze initiated in 2021/22, the new state pension, which was around 75% of the tax threshold, is forecasted to surpass the tax threshold to 102% by 2027/28 with just a 2.5% triple lock increase.
Steve Webb from LCP stated, “A combination of high inflation and frozen tax thresholds has led to a surge in the number of pensioners paying tax. If the Chancellor opts to extend the thresholds for an additional two years, the total number of pensioners paying tax could reach around 9.3 million. However, if inflation or wage growth accelerates, this figure could rise to 10 million by the decade’s end.” Most pensioners will not be required to file tax returns, as any taxes owed will typically be collected through their private pensions or the ‘simple assessment’ process conducted by HMRC.