A recent study reveals that if the current freeze on tax thresholds continues until 2030, approximately 10 million pensioners could be pushed into the bracket of paying income tax by the end of the decade.
Under the current system, individuals can earn up to £12,570 each tax year before becoming liable to pay income tax, known as the personal allowance, which has remained stagnant since the 2021/22 tax year.
While the freeze is anticipated to conclude by the 2028/29 tax year, there are speculations that Rachel Reeves might extend it for an additional two years until 2030. According to research conducted by former pensions minister Steve Webb, in collaboration with LCP, extending the freeze would result in an additional 500,000 state pensioners being subject to income tax.
It is projected that around 9.3 million pensioners, accounting for three-quarters of all pensioners, will be affected by this change, compared to the current estimate of 8.7 million pensioners.
Furthermore, LCP suggests that the number of pensioners paying income tax could potentially escalate to 10 million by the end of the decade if there is an increase in inflation or wage growth in the upcoming years.
The state pension undergoes an annual increase every April based on the highest value among earnings growth between May to July, inflation in September, or a minimum of 2.5%.
The full new state pension is expected to rise from £230.25 per week to £241.30 per week in April 2026, reflecting a 4.8% wage growth, with detailed information to be disclosed in the Budget.
Following the freeze implementation in 2021/22, the new state pension was roughly 75% of the tax threshold. By 2027/28, even with a modest 2.5% triple lock increase in the state pension, LCP predicts that the new state pension will surpass the tax threshold by 102%.
Steve Webb, a partner at LCP, highlighted the impact of high inflation and frozen tax thresholds on pensioners, emphasizing that an extension of the freeze could lead to a significant rise in the number of pensioners paying taxes, including those falling in the 40% tax bracket or above.
He also noted that while most affected pensioners may not need to file tax returns, any tax owed will likely be collected through their private pensions or via the ‘simple assessment’ process managed by HMRC.