Ten million retirees might face income tax obligations by the end of the decade if the current freeze on tax thresholds is prolonged until 2030, according to recent research findings.
Individuals can earn £12,570 annually before becoming liable for income tax, known as the personal allowance, which has remained stagnant since the 2021/22 tax year.
Although the freeze is scheduled to conclude by the 2028/29 tax year, there are indications that Rachel Reeves could extend it for an additional two years, impacting a significant number of state pensioners.
Recent data from Steve Webb, a former pensions minister and LCP partner, reveals that if the Chancellor decides to extend the freeze on income tax thresholds, around half a million more state pensioners would be subject to income tax.
This indicates that approximately 9.3 million retirees would be paying taxes, representing three-quarters of all pensioners, compared to the present figure of around 8.7 million.
LCP projects that the number of pensioners paying income tax could escalate to ten million by the decade’s end if inflation or wage growth accelerates in the forthcoming years.
The state pension undergoes annual adjustments in April based on the highest of earnings growth between May and July, September’s inflation rate, or a minimum of 2.5%.
The full new state pension is anticipated to rise from £230.25 per week to £241.30 per week in April 2026, mirroring a 4.8% wage growth, with specific details expected to be disclosed during the Budget announcement.
When the freeze commenced in 2021/22, the new state pension was approximately 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 of LCP expressed concerns over the impact of high inflation and frozen tax thresholds on pensioners, emphasizing the potential for an additional half a million pensioners to be affected if the thresholds are extended.
Moreover, Webb highlighted that most affected pensioners would not need to file tax returns, as any owed taxes would typically be collected through their private pension tax codes or the ‘simple assessment’ process utilizing existing HMRC data.
