Ten million retirees may face the prospect of being subject to income tax by the end of the decade if the freeze on tax thresholds is prolonged until 2030, according to recent findings.
The current standard allows individuals to earn £12,570 annually before income tax kicks in, known as the personal allowance, which has remained static since the 2021/22 tax period.
The freeze is anticipated to persist until the 2028/29 tax year, but there are indications that Rachel Reeves may propose an extension to 2030.
An analysis by former pensions minister and LCP partner Steve Webb reveals that extending the freeze for an additional two years could result in an extra 500,000 state pensioners being taxed.
It is projected that approximately 9.3 million pensioners, accounting for roughly three-quarters of all retirees, will pay taxes, up from around 8.7 million presently.
However, LCP suggests that this figure could escalate to ten million pensioners paying income tax by the decade’s end if inflation or wage growth accelerates in the forthcoming years.
The triple lock mechanism ensures that the state pension increases annually in line with the highest of earnings growth from May to July, September inflation, or a 2.5% minimum hike.
The full new state pension is expected to rise from £230.25 per week to £241.30 per week in April 2026, correlating with a 4.8% wage surge, with specifics to be disclosed in the Budget.
When the freeze commenced in 2021/22, the new state pension was roughly 75% of the tax threshold. By 2027/28, even with just a 2.5% triple lock upsurge in the state pension, LCP predicts that the new state pension will surpass the tax threshold by 102%.
Steve Webb, a partner at pension consultancy LCP, expressed concerns over the impact of stagnant tax thresholds and high inflation, leading to a surge in pensioners falling into tax brackets of 40% or more.
Webb stated, “If the Chancellor opts to extend the threshold freeze for an additional two years, at least half a million more pensioners could be affected, bringing the total to around 9.3 million—representing three-quarters of all retirees.”
He added, “With the possibility of heightened inflation or wage growth, the figure could reach 10 million pensioner taxpayers by 2030. The majority of current pensioners retired under the old state pension system, with approximately 2.5 million already having a state pension exceeding the income tax threshold.”
“By 2027/28, those on the full rate of the new state pension will inherently surpass the tax threshold solely based on their state pension.”
“Fortunately, most of these pensioners will not need to file tax returns, as any dues will typically be collected through their private pension tax codes or the ‘simple assessment’ process administered by HMRC utilizing existing data to calculate tax obligations.”