A recent study indicates that if the current freeze on tax thresholds continues until 2030, approximately ten million pensioners could become liable to pay income tax by the end of the decade. The threshold for income tax stands at £12,570 per tax year, known as the personal allowance, and has remained at this level since the 2021/22 tax year.
Although the freeze is scheduled to end in the 2028/29 tax year, there are reports suggesting that Rachel Reeves may extend it for an additional two years. According to new findings by former pensions minister Steve Webb, in partnership with LCP, extending the freeze for two more years could result in an additional half a million state pensioners being subject to income tax.
It is projected that by the end of the decade, at least 9.3 million pensioners will be paying tax, representing around three-quarters of all pensioners, compared to the current figure of around 8.7 million. LCP warns that this number could potentially rise to ten million pensioners paying income tax by the end of the decade if inflation or wage growth accelerates in the upcoming years.
The state pension undergoes annual adjustments through the triple lock system, ensuring that it increases every April based on the highest of earnings growth between May and July, inflation in September, or a minimum of 2.5%. The full new state pension is anticipated to rise from £230.25 to £241.30 per week in April 2026, reflecting a 4.8% wage growth.
As the freeze on tax thresholds persists, more pensioners are at risk of being pulled into the tax net. Steve Webb from LCP expressed concerns about the impact of high inflation and frozen tax thresholds on pensioners, forecasting that the number of pensioners paying tax could reach 10 million by the end of the decade if economic conditions worsen. Despite this, the majority of affected pensioners are not expected to file tax returns, as any tax owed will likely be collected through their private pensions or via the ‘simple assessment’ process conducted by HMRC.