A recent study reveals that if the freeze on tax thresholds continues until 2030, approximately ten million pensioners could be impacted by income tax obligations by the end of the decade. Presently, individuals can earn £12,570 annually before income tax applies, a level that has remained constant since the 2021/22 tax year. Reports suggest that politician Rachel Reeves might extend this freeze for an additional two years beyond the 2028/29 tax year.
Research conducted by former pensions minister Steve Webb, now a partner at LCP, indicates that extending the freeze for an extra two years could result in an additional half a million state pensioners becoming liable for income tax. This would mean that around 9.3 million pensioners, accounting for three-quarters of all pensioners, would be paying taxes, compared to the current figure of about 8.7 million.
LCP warns that if inflation or wage growth accelerates in the upcoming years, the number of pensioners subject to income tax could escalate to ten million by the decade’s conclusion. The state pension undergoes annual adjustments under the triple lock mechanism, with the full new state pension anticipated to rise from £230.25 to £241.30 weekly in April 2026, reflecting a 4.8% wage growth.
As of the 2021/22 freeze commencement, the new state pension equated to roughly 75% of the tax threshold. By 2027/28, even with just a 2.5% increase through the triple lock, the new state pension is projected to surpass the tax threshold by 102%.
Steve Webb from LCP remarked that a combination of stagnant tax thresholds and rising inflation has led to a surge in pensioners paying taxes, potentially affecting over 9.3 million pensioners if the freeze is extended. However, he indicates that most pensioners will not need to file tax returns, as any owing taxes will likely be collected through existing tax codes or the ‘simple assessment’ process managed by HMRC.