Millions of Pensioners Targeted in Potential Tax Shake-Up
Chancellor Rachel Reeves is reportedly considering a significant increase in income tax, a move that would disproportionately impact millions of pensioners across the UK. According to recent reports, some retirees could face additional tax bills of up to £2,500.
The Chancellor has allegedly informed the Office for Budget Responsibility that raising personal taxation is among the ‘major measures’ being evaluated for her upcoming Budget, expected later this month. If implemented, this would mark the first major increase to income tax in approximately 50 years.
How the Tax Swap Would Work
The proposed plan involves a complex fiscal swap. One option under consideration is a 2p rise in income tax offset by a 2p cut in National Insurance for earnings between £12,571 and £50,270.
For most working taxpayers, this change would result in little to no difference in their take-home pay. However, the story is starkly different for pensioners. Because they do not pay National Insurance, they would not benefit from the cut and would bear the full brunt of the income tax increase.
Analysis conducted by the investment firm AJ Bell reveals the scale of the potential impact:
- Workers earning £100,000 could pay an extra £1,000 per year.
- Those on incomes over £125,140 would lose around £1,700.
- Additional-rate pensioners could be hit hardest, facing a potential extra bill of £2,502.80.
This change would affect almost nine million state pensioners, including 124,000 who currently pay the top 45% tax rate.
Broken Pledges and Wider Consequences
The potential policy has sparked controversy, as it appears to contradict the Labour Party's manifesto, which ruled out increases to VAT, National Insurance, or income tax. Reports suggest the Chancellor is preparing to break this pledge to address a growing black hole in public finances, exacerbated by weaker growth forecasts and higher borrowing costs.
While Ms Reeves has stated that those with the “broadest shoulders” should pay their fair share, critics have labelled the plans a stealth raid on older savers.
This is not the only measure targeting retirees. In her recent fiscal statement, the Chancellor also announced that from April 2027, unspent pensions will fall within the scope of inheritance tax. This could lead to death duty bills reaching up to 67% on leftover savings.
Furthermore, changes to the winter fuel payment mean it is now taxable. This will result in higher-earning pensioners effectively paying it back through the tax system if they earn more than £35,000.
Additional proposals, urged by the Labour-linked Fabian Society think tank, have included cutting the tax-free pension lump sum from its current £268,275 to just £100,000, deeming the existing rules as overly generous and unfair.
A Treasury spokesman declined to comment on the speculation, stating: “We do not comment on speculation around changes to tax outside of fiscal events.”
