A recent study indicates that approximately ten million retirees may find themselves liable for income tax by the end of the decade if the freeze on tax thresholds continues until 2030. Typically, individuals can earn £12,570 annually before income tax kicks in, known as the personal allowance, which has remained stagnant since the 2021/22 tax year.
Although the freeze on tax thresholds is slated to conclude by the 2028/29 tax year, there are speculations that this could be prolonged until 2030 by Rachel Reeves. Analysis by former pensions minister Steve Webb of LCP reveals that extending the freeze by two additional years could result in an extra 500,000 state pensioners becoming subject to income tax.
Based on projections, it is estimated that over 9.3 million pensioners would be paying tax, constituting around 75% of all retirees, compared to the current 8.7 million. This number could potentially 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 in April through the triple lock mechanism, which considers the highest of earnings growth, inflation, 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, aligning with a 4.8% wage growth, with precise details expected in the upcoming Budget.
When the freeze commenced in 2021/22, the new state pension was roughly 75% of the tax threshold. However, by 2027/28, even with a 2.5% increase under the triple lock, the new state pension is projected to surpass the tax threshold by 102%.
Steve Webb from LCP noted the concerning trend of more pensioners entering the tax bracket due to the combination of high inflation and frozen tax thresholds. If the freeze is extended, it is predicted that at least half a million more retirees could be affected, bringing the total to around 9.3 million pensioners, with a potential rise to 10 million by the decade’s end. While many of these pensioners may not need to file tax returns, any dues are typically collected through their private pensions or the ‘simple assessment’ process by HMRC.