A recent study indicates that if the current freeze on tax thresholds is prolonged until 2030, approximately ten million pensioners could be required to pay income tax by the end of the decade. Typically, individuals can earn up to £12,570 per tax year before becoming liable for income tax, a level that has remained constant since the 2021/22 tax year.
There are reports suggesting that Rachel Reeves might extend the freeze on tax thresholds until 2030, which would result in an additional half a million state pensioners being subject to income tax. This move could see the number of pensioners paying taxes rise to at least 9.3 million, representing about three-quarters of all pensioners, compared to the current figure of around 8.7 million.
According to pension experts, LCP, the number of pensioners paying income tax could potentially escalate to ten million by the decade’s end if inflation or wage growth accelerates in the upcoming years. The state pension undergoes an annual increase in April based on the highest of earnings growth, inflation, or 2.5%.
It is projected that the full new state pension will rise from £230.25 to £241.30 per week in April 2026, reflecting a 4.8% wage growth. This increase could result in the new state pension exceeding the tax threshold by 2027/28, even with a modest 2.5% increase through the triple lock mechanism.
Steve Webb, a partner at pension consultancy LCP, highlighted the impact of frozen tax thresholds and high inflation on pensioners, noting that if the freeze continues, the number of pensioners paying taxes could surge further. He emphasized that while many pensioners may not need to file tax returns, the tax owed would be collected through their private pensions or through HMRC’s assessment process.