A recent study indicates that around ten million pensioners might be required to pay income tax by the end of the decade if the freeze on tax thresholds continues until 2030. Typically, individuals can earn up to £12,570 per tax year before becoming liable for income tax, known as the personal allowance, which has remained unchanged since the 2021/22 tax year.
The current freeze on income tax thresholds is expected to extend until the 2028/29 tax year, with the possibility of an additional two-year extension to 2030 under consideration by Rachel Reeves. Analysis by former pensions minister Steve Webb of LCP reveals that if the freeze is prolonged, an extra half a million state pensioners could enter the income tax bracket.
According to LCP, the number of pensioners paying income tax could rise from the current 8.7 million to at least 9.3 million, which accounts for about three-quarters of all pensioners. This figure could potentially reach ten million by the decade’s end if inflation or wage growth accelerates.
The state pension undergoes an annual increase in April through the triple lock mechanism, ensuring adjustments based on the highest of earnings growth, inflation, or a minimum of 2.5%. The new state pension is anticipated to rise from £230.25 to £241.30 weekly in April 2026, reflecting a 4.8% wage growth.
With the freeze in place since 2021/22, the new state pension has gradually surpassed the tax threshold. If the freeze continues, the new state pension could exceed the tax threshold by 102% in 2027/28. Steve Webb from LCP warns that a combination of inflation and stagnant tax thresholds could lead to a significant increase in pensioners paying income tax.
Despite these changes, most pensioners will likely not need to file tax returns, as any tax owed can be collected through their private pensions or the ‘simple assessment’ process managed by HMRC.