Brits on state pension to be caught by income tax for first time
All Brits on the full state pension will be dragged into paying income tax in 2027 for the first time, researchers have warned, amid growing speculation that thresholds will be frozen for an extended period.
The Institute for Fiscal Studies (IFS) think tank has warned that 100 per cent of those on the full state pension will face tax on their allowances by 2027-28 due to “stealth tax” freezes on thresholds.
This comes as Rachel Reeves is reportedly considering extending the freeze on income tax thresholds, which is currently due to end in 2028, to 2030 at this month’s Budget.
Just under half of pensioners on the full state allowance already paid income tax in 2022-23 given they receive income through other streams.
Threshold freezes – known as a “stealth tax” because they raise revenue without requiring an increase in rates – are also hitting low-income workers, IFS has warned.
The freeze on income tax thresholds would follow years of the triple lock pension, the mechanism by which the state pension rises by whichever is highest out of inflation or wage growth, increasing at a faster pace than earnings across the UK.
Economists, including those at the Office for Budget Responsibility, have warned that the triple lock is unsustainable given the threat to public finances in the case of new economic shocks.
Pension tax threat
A minimum wage worker would have to work only 18 hours per week to be charged income tax if Reeves extends the freeze to 2030, analysts said.
The freeze means that the Treasury gains more from increases in the minimum wage, while less of this pay rise goes to workers.
Reeves is expected to raise the national living wage at the Budget, and employers have warned this will lead to higher costs and squeeze businesses’ profits.
The IFS estimates that a two-year extension of the freeze to income tax rates would push 960,000 more Brits into paying the tax.
Some 790,000 earners would be pushed into paying the 40 per cent higher rate by this freeze extension, IFS says.
This, along with a further two-year freeze on national insurance thresholds, would raise £8.3bn for the Treasury, they said.
Matthew Oulton, a research economist at IFS, said: “The Chancellor may well want to raise more revenue and change who pays tax, and changing thresholds is a reasonable tool to use.
“But freezes set many years in advance are not – how big the tax rise turns out to be depends upon the unknown and unpredictable path of inflation.”
As well as extending the threshold freeze, Reeves is considering using the Budget to announce a 2p increase in the basic rate of income tax.