Research indicates that approximately ten million pensioners may be required to pay income tax by the end of the decade if the freeze on tax thresholds is extended until 2030.
Individuals can typically earn £12,570 per tax year before income tax becomes applicable, known as the personal allowance, which has remained fixed at this level since the 2021/22 tax year.
The freeze is projected to conclude by the 2028/29 tax year; however, there are suggestions that Rachel Reeves might extend it by an additional two years until 2030.
An analysis by former pensions minister and LCP partner, Steve Webb, reveals that if the Chancellor decides to prolong the freeze on income tax thresholds for two more years, an additional half a million state pensioners would fall into the income tax bracket.
This would result in at least 9.3 million pensioners being taxed, approximately three-quarters of all pensioners, compared to the current figure of about 8.7 million.
LCP forecasts that this number could escalate to ten million pensioners paying income tax by the end of the decade if inflation or wage growth accelerates in the forthcoming years.
The state pension undergoes an annual increase every April, aligning with the highest of earnings growth between May to July, September inflation, or a minimum of 2.5%.
The anticipated rise in the full new state pension from £230.25 per week to £241.30 per week in April 2026, based on a 4.8% wage growth, is set to be disclosed in the Budget.
When the freeze commenced in 2021/22, the new state pension was roughly 75% of the tax threshold. However, with a 2.5% triple lock rise in 2027/28, LCP projects that the new state pension will exceed the tax threshold by 102%.
Steve Webb from pension consultancy firm LCP highlighted the impact of stagnant tax thresholds and high inflation on the rising number of pensioners subject to taxation, especially at the 40% rate.
Webb stated, “Should the Chancellor opt to extend the freeze for an additional two years, we anticipate a minimum of half a million more pensioners being brought into the tax net, totaling around 9.3 million – representing three-quarters of all pensioners.”
“If inflation or wage growth accelerates, this figure could reach 10 million pensioner taxpayers by the end of the decade. The majority of existing pensioners retired under the old state pension system, with around 2.5 million already receiving a state pension exceeding the income tax threshold.”
“From 2027/28 onwards, individuals on the full new state pension will surpass the tax threshold based solely on their state pension entitlement.”
“Fortunately, most of these pensioners will not need to file a tax return, as any tax obligations will typically be settled through their private pension tax code or via the ‘simple assessment’ process, utilizing existing HMRC data to calculate tax liabilities.”