A recent study reveals that if the freeze on tax thresholds is prolonged until 2030, approximately ten million pensioners could be pulled into the income tax bracket by the end of the decade. The current personal allowance stands at £12,570 per tax year and has remained stagnant since 2021/22.
While the freeze is slated to conclude in the 2028/29 tax year, there are indications that Rachel Reeves might extend it until 2030. The extension could result in an additional half a million state pensioners becoming liable to pay income tax, according to findings by former pensions minister Steve Webb, who is now a partner at LCP.
As of now, around 8.7 million pensioners pay taxes, with the freeze potentially pushing this figure to at least 9.3 million pensioners by the decade’s end. LCP warns that this number could escalate to ten million if inflation or wage growth accelerates in the coming years.
The state pension undergoes an annual increase in April through the triple lock mechanism, which factors in the highest of earnings growth, inflation, or 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.
The freeze initiated in 2021/22 had the new state pension at around 75% of the tax threshold. By 2027/28, a mere 2.5% increase through the triple lock would push the new state pension to 102% of the tax threshold, as projected by LCP.
Steve Webb from LCP expressed concerns over the potential impact of extended frozen tax thresholds, expecting more pensioners to be pushed into the tax net, with a significant portion likely reaching the 40% tax bracket. Nevertheless, most affected pensioners are not required to file tax returns, as any dues will typically be managed through their pensions or via the ‘simple assessment’ process conducted by HMRC.