A staggering ten million pensioners across the UK could be pulled into the income tax net by the year 2030 if the government extends its current freeze on tax thresholds, according to new research.
The Deepening Tax Burden for Retirees
The personal allowance, which is the amount you can earn before starting to pay income tax, has been frozen at £12,570 since the 2021/22 tax year. This freeze is currently scheduled to last until the 2028/29 tax year. However, recent reports indicate that Chancellor Rachel Reeves might prolong this freeze for an additional two years, pushing it to 2030.
Analysis conducted by Steve Webb, a former pensions minister and now a partner at pension consultants LCP, has uncovered the profound consequences of such a move. His findings show that extending the freeze would immediately drag an extra half a million state pensioners into paying income tax.
Triple Lock Push and Tax Threshold Squeeze
This surge is primarily driven by the interaction between frozen tax bands and the state pension's triple lock mechanism. The triple lock guarantees that the state pension increases every April by the highest of three measures: earnings growth, inflation (based on the September figure), or 2.5%.
For instance, the full new state pension is projected to rise from £230.25 a week to £241.30 a week in April 2026, reflecting a 4.8% wage growth increase. When the freeze began in 2021/22, the new state pension was worth about three-quarters of the tax-free personal allowance. However, LCP calculates that by 2027/28, even with just a minimal 2.5% triple lock increase, the new state pension will reach 102% of the tax threshold, meaning anyone receiving the full amount will be a taxpayer based on their state pension alone.
Consequences and Administrative Relief
This shift creates a dramatic change in the retirement landscape. The number of pensioners paying income tax would jump from around 8.7 million today to at least 9.3 million, representing roughly three-quarters of all pensioners. LCP further warns that if inflation or wage growth accelerates in the coming years, the total number of pensioner taxpayers could hit the ten million mark by the end of the decade.
Steve Webb commented on the analysis, stating: "A combination of high inflation and frozen tax thresholds has led to a surge in the number of pensioners paying tax. If the Chancellor decides to freeze thresholds for another two years, we will see at least half a million more pensioners dragged into the tax net as a minimum." He also highlighted that around 2.5 million pensioners who retired under the old state pension system already have an income above the tax threshold.
Despite the daunting prospect for millions, Webb offered one piece of practical good news: "The majority of these pensioners will not need to fill in a tax return. Any tax due will usually be collected via a tax code on their private pensions or through the 'simple assessment' process which involves HMRC using information it already holds to work out a tax bill."
