Ten million retirees may face income tax obligations by the end of the decade if the current freeze on tax thresholds is prolonged until 2030, according to recent research findings.
Individuals can earn up to £12,570 annually before being subject to income tax, known as the personal allowance, which has remained unchanged since the 2021/22 tax year.
Reports indicate that Rachel Reeves may extend the freeze on income tax thresholds until 2030, beyond the current end date of the 2028/29 tax year. This extension could result in an additional 500,000 state pensioners being included in the taxpayer bracket.
Based on data from former pensions minister Steve Webb, the number of pensioners paying income tax is projected to rise to at least 9.3 million, accounting for around three-quarters of all pensioners, compared to the current figure of approximately 8.7 million.
If inflation or wage growth accelerates in the upcoming years, the number of pensioners liable for income tax could surge to ten million by the close of the decade.
The state pension undergoes annual adjustments through the triple lock mechanism, with the full new state pension anticipated to rise to £241.30 weekly in April 2026, reflecting a 4.8% wage growth. Details of this adjustment are expected to be disclosed in the Budget.
As of the freeze initiation in 2021/22, the new state pension represented about 75% of the tax threshold. By 2027/28, even with a 2.5% increase under the triple lock, the new state pension is projected to surpass the tax threshold by 102%.
Steve Webb from pension consultancy LCP highlighted that prolonged tax threshold freezes coupled with high inflation could result in a significant increase in pensioners falling under the tax net, potentially reaching 10 million by the decade’s end. However, most affected pensioners are not required to file tax returns, as any owed taxes are typically collected through existing information held by HMRC.
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