A recent study reveals that approximately ten million pensioners may find themselves liable to pay income tax by the end of the decade if the current freeze on tax thresholds is prolonged until 2030.
Under the current tax regulations, individuals can earn up to £12,570 per tax year without being subject to income tax, known as the personal allowance, which has remained stagnant since the 2021/22 tax year.
Although the freeze on tax thresholds is expected to conclude by the 2028/29 tax year, there are indications that Rachel Reeves might extend this freeze for an additional two years until 2030.
According to data from former pensions minister and LCP partner Steve Webb, extending the freeze on income tax thresholds could result in an extra 500,000 state pensioners being required to pay income tax.
The number of pensioners paying income tax is projected to rise from 8.7 million to at least 9.3 million by the end of the decade, potentially reaching ten million if inflation or wage growth accelerates in the coming years.
The state pension is designed to increase annually in April based on the highest of earnings growth between May to July, September inflation rate, or a minimum of 2.5%.
Anticipated figures suggest that the full new state pension could climb from £230.25 per week to £241.30 per week in April 2026, in response to a 4.8% wage growth, with official details awaited in the upcoming Budget announcement.
At the onset of the freeze in 2021/22, the new state pension was roughly 75% of the tax threshold. By 2027/28, even with a 2.5% increase under the triple lock system, the new state pension is projected to surpass the tax threshold by 102%.
Steve Webb from pension consultants LCP expressed concerns over the potential implications of extending the freeze on tax thresholds, emphasizing that a significant number of pensioners could be impacted, with a substantial portion already above the income tax threshold.
He further highlighted that while most affected pensioners may not necessitate filing tax returns, any taxes owed would typically be managed through their private pensions or the ‘simple assessment’ procedure conducted by HMRC.