A recent study reveals that if the freeze on tax threshold continues until 2030, approximately ten million pensioners could be required to pay income tax by the end of the decade. The current personal allowance stands at £12,570 annually, where individuals can earn before income tax applies, and it has been locked at this level since the 2021/22 tax year.
There are indications that Rachel Reeves might extend the freeze on income tax thresholds until 2030, potentially affecting an additional half a million state pensioners who would fall under the income tax bracket if the freeze is prolonged. This would lead to an estimated 9.3 million pensioners paying taxes, accounting for about three-quarters of all pensioners, compared to the current 8.7 million.
Experts suggest that the number of pensioners paying income tax could surge to ten million by the end of the decade if inflation or wage growth accelerates in the upcoming years. Despite the potential increase in pensioners paying taxes, the state pension is expected to rise in April 2026 to £241.30 a week from the current £230.25, reflecting a 4.8% wage growth.
The combination of a frozen tax threshold and high inflation has resulted in more pensioners being subject to taxes, with some even falling into the 40% tax bracket. The continuous freeze on tax thresholds could lead to a significant rise in the number of pensioners paying taxes, with projections indicating that the majority of pensioners will surpass the income tax threshold by 2027/28, mainly due to the state pension alone.
An optimistic note is that most of these pensioners will not be required to file tax returns, as any tax owed will likely be collected through the tax code on their private pensions or via the ‘simple assessment’ process facilitated by HMRC.
