A recent study indicates that if the current freeze on tax thresholds continues until 2030, approximately ten million pensioners could be affected by income tax obligations by the end of the decade.
Individuals typically have a personal allowance of £12,570 per tax year before income tax kicks in, a threshold that has remained constant since the 2021/22 tax year.
While initially planned to conclude by the 2028/29 tax year, there are speculations that Rachel Reeves may extend this freeze for an additional two years, potentially affecting an extra half a million state pensioners.
According to findings by former pensions minister Steve Webb, if the Chancellor prolongs the freeze on income tax thresholds, an additional 500,000 state pensioners could find themselves liable to pay income tax.
The analysis suggests that the number of pensioners paying income tax could surge to ten million by the end of the decade, particularly if inflation or wage growth accelerates in the near future.
Currently, around 9.3 million pensioners are projected to be paying tax, representing about three-quarters of all pensioners, compared to the current 8.7 million.
It is anticipated that the full new state pension will rise from £230.25 to £241.30 weekly in April 2026, aligned with a 4.8% wage growth, with details expected to be disclosed during the Budget announcement.
The freeze on tax thresholds starting from 2021/22 has led to the new state pension being approximately 75% of the tax threshold. However, by 2027/28, even with a mere 2.5% increase under the triple lock, the new state pension is projected to surpass the tax threshold by 102%.
Steve Webb from pension consultants LCP emphasized the impact of inflation and frozen tax thresholds on pensioners, anticipating that another 500,000 pensioners could potentially fall into the tax bracket if the freeze continues, totaling around 9.3 million pensioners.
Despite these changes, most affected pensioners are not required to file tax returns, as any tax owed is typically collected through their private pensions or via HMRC’s ‘simple assessment’ process utilizing existing information to calculate tax liabilities.
