Ten million retirees may face paying income tax by the end of the decade if the freeze on tax thresholds extends until 2030, according to recent research findings. Under current regulations, individuals can earn up to £12,570 per tax year before becoming subject to income tax, with this threshold remaining unchanged since the 2021/22 tax year.
While the freeze is scheduled to conclude in the 2028/29 tax year, there are indications that Rachel Reeves may push the extension to 2030. Analysis by former pensions minister Steve Webb, now a partner at LCP, reveals that prolonging the freeze for an additional two years could result in an additional 500,000 state pensioners being liable for income tax.
The number of pensioners paying tax is projected to rise to at least 9.3 million, accounting for approximately three-quarters of all retirees, up from around 8.7 million presently. LCP warns that this figure could climb to ten million by the decade’s end if inflation or wage growth accelerates in the upcoming years.
The state pension undergoes an annual increase every April through the triple lock mechanism, which considers the highest of earnings growth between May and July, September’s inflation rate, or a 2.5% minimum increase. The full new state pension is anticipated to rise from £230.25 to £241.30 weekly by April 2026, reflecting a 4.8% wage growth.
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 adjustment, the new state pension is predicted to surpass the tax threshold by 102%.
Steve Webb from LCP expressed concerns over the impact of frozen tax thresholds and high inflation on pensioners, foreseeing a significant rise in the number of pensioners paying tax. Webb emphasized that an additional 500,000 pensioners could be affected if the freeze is extended, potentially reaching a total of 9.3 million taxpayers, and could escalate to ten million if economic conditions worsen.
While most affected pensioners may not need to file tax returns, any dues are likely to be collected through their private pensions or the simple assessment process conducted by HMRC, utilizing existing data to determine tax liabilities.