Ten million pensioners could be paying income tax by end of the decade if a freeze on the £12,570 basic rate threshold is extended until 2030 as predicted, new research shows.
That projection is based on the strong likelihood inflation or wage growth will be higher than 2.5 per cent, and so determine the triple lock increase in the state pension in any of the next few years.
The full flat-rate state pension will already nudge the threshold where people start being stung for income tax when it rises from £11,973 now to £12,548 next April – that is settled, no matter what happens in the Budget this week.
Many pensioners already earn over the £12,570 personal allowance, landing them with an income tax bill if they have a private pension too, or if they earned state pension top-ups during their working life or delayed taking the payments at state retirement age.
If the state pension rises by just 2.5 per cent under the triple lock, the number would still rise from 8.7 million now to 9.3million by 2030, according to analysis of Government data by former Pensions Minister Steve Webb.
Extra burden: Many pensioners already earn over the £12,570 personal allowance, landing them with an income tax bill if they have a private pension too – and this is set to rise
He says this allows for the state pension age rising from 66 to 67 between 2026 and 2028 (the age you can access private pensions will also rise, from 55 to 57, in April 2028).
‘A combination of high inflation and frozen tax thresholds has led to a surge in the number of pensioners paying tax, and in the numbers paying at 40 per cent or above,’ says Webb, who is a partner at pension consultants LCP and This is Money’s retirement columnist.
‘If the Chancellor decides to freeze thresholds for another two years, we will see at least half a million more pensioners dragged into the tax net as a minimum.’
Webb adds that the majority of today’s pensioners retired under the old state pension system, and around 2.5million of them already have a state pension above the income tax threshold.
A further half a million retired under the new system from spring 2030, but with ‘protected payments’ earned earlier in their working life which take them above the standard flat rate.
Webb says: ‘From 2027/28, anyone on the full rate of the new state pension will also be above the tax threshold based on their state pension alone.
‘The one bit of good news is that most of these pensioners will not need to fill in a tax return.
‘Any tax due will usually be collected via a tax code on their private pensions or through the “simple assessment” process which involves HMRC using information it already holds to work out a tax bill.’
Rapid rise of the tax-paying pensioner
The last Government began the income tax threshold freeze in 2021/22, and it was prolonged by Rachel Reeves in her Budget last year to at least 2028.
She is thought likely to extend it again to 2030 in the Budget this Wednesday, to help fill the hole in the country’s finances – although she has reportedly dropped plans to increase the rates of income tax that people pay.
That means many more people have to pay tax, or are pushed into higher tax brackets, under what’s called ‘fiscal drag’ even if headline rates stay the same.
Webb says that in 2021/22, the new state pension was around three quarters of the tax threshold, but in 2027/28 even with just a 2.5 per cent ‘triple lock’ increase it will be 102 per cent of the threshold.
He says in 2021 there were around 6.7m pensioners paying tax, two million fewer than today. Webb adds that this year just over one million pensioners will pay tax at 40 per cent or above, double the half a million doing so four years ago.
Webb says the chart below shows the different amounts of state pension received each week, split by whether people are on the old pre-2016 or new state pension system.
New state pension rates and the income tax threshold: People are taxed on 52 weeks’ worth of state pension, so this table compares 52 times the weekly rate of the new state pension with the annual rate of the tax free allowance. It projects for 2026/27 on the basis of an expected 4.8% increase based in growth in average earnings, and for 2027/28 on the basis the state pension will rise by at least 2.5%. Source: LCP
He notes the huge spike for those in the £230-£235 range, overwhelmingly those on the new state pension because the standard flat rate was £230.25 a week in 2025/26 and the large majority of people reaching age 66 now receive this amount.
There is a smaller spike in the £105-£110 range accounted for by married women on the old state pension getting 60 per cent of the basic rate from their husband’s contributions, and some people over-80 who get this amount – this is currently £101.55.
Meanwhile, the jump just above the £176.45 current basic rate of the old state pension is because most people on this weekly sum also earned some ‘additional’ amounts during their working lives.
Webb says: ‘Around 800,000 people are on relatively large state pensions of around £300 per week or more. The large majority of these are on the old system and have these large pensions because of substantial entitlement to additional pensions.
‘A small number of those in this group will be there because of “deferring” taking their state pension which was rewarded by a 10.4 per cent per year uplift for each year of deferral under the old state pension system.’
That uplift was cut to 5.8 per cent for people deciding to delay from April 2016 onward – find out the current rules on state pension deferral here.
Source: LCP
How triple lock has hiked state pension over the years
Annual rises: Here’s how the triple lock has boosted state pension payments since April 2011 (Source: Institute for Fiscal Studies)
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