Pensioners are being warned that every person receiving the full new state pension will be paying income tax by 2027-28, according to new analysis from the Institute for Fiscal Studies.
At the moment, fewer than half of state pensioners pay tax on their pension income, but that is set to change completely within just five years.
The shift is driven by the government’s decision to freeze tax thresholds while the value of the state pension continues to rise. As a result, the full new state pension is expected to overtake the £12,570 personal allowance for the first time in history.
The IFS says this marks a fundamental change in how the state pension is treated for tax purposes, with the proportion of full state pension recipients paying income tax rising from under 50 per cent in 2022-23 to 100 per cent by 2027-28.
In last year’s Budget, Chancellor Rachel Reeves said that she would not extend the freeze on tax thresholds because it would “hurt working people,” but she is now widely expected to reverse that position in two weeks’ time due to the poor state of the public finances.
Freezing thresholds brings in more tax for the Government because inflation and rising wages push people into higher tax brackets or above the personal allowance without the headline tax rates changing.
New analysis from the Institute for Fiscal Studies shows that if Ms Reeves extends the freeze by a further two years to April 2030, it would raise £8.3billion in that single year. The think tank said the threshold freeze has already had a major effect on who pays income tax and how much they pay.
The freeze, initially implemented by the previous Conservative administration in April 2023, continues to operate as what critics describe as a “stealth tax” on pensioners.
The IFS warns that the impact of frozen tax thresholds would go far beyond simply collecting more income tax. Single pensioners who rely solely on the state pension could end up eligible for pension credit once income tax pushes their net income below benefit thresholds.
This would then open the door to additional entitlements such as free TV licences, creating heavy administrative demands for government and for older people who would suddenly need to navigate complex benefit systems.
‘Stealth tax’ warning as millions could be hit with a bill worth thousands | GETTY The think tank also cautioned that millions of pensioners would be forced to deal directly with HMRC for the first time in their lives, resulting in an unprecedented administrative burden for retirees who have never previously filed tax returns.
Future increases to the state pension would also bring less financial benefit than expected, as a growing share would be taken back through income tax, reducing the real-terms value of triple lock rises.
The threshold freeze would not stop at pensioners. Minimum wage earners are increasingly being pulled into the tax system as earnings rise while tax allowances stay frozen.
The IFS calculations reveal that a minimum wage employee would require just 18 hours of weekly work to incur income tax liability by 2029-30, representing the lowest threshold since minimum wage introduction in 1999.
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Older Britons are already concerned about the rising tax burden | GETTYThis development would significantly diminish the value of wage increases for lower-paid workers, as the Treasury would claim an expanding share of each pay rise through taxation.
The IFS criticised the mechanism of multi-year freezes, arguing that inflation’s unpredictable trajectory makes revenue outcomes uncertain and real threshold values impossible to determine accurately.
Matthew Oulton, a research economist at the IFS, stated: “The freezes to personal tax thresholds have already represented a huge tax rise. Extending them would raise significant revenue in a broad-based and progressive way.”
Because sacrifice has many tax advantages, the system has often been “under scrutiny” | GETTY
A Treasury spokesperson defended the government’s position, saying: “Thanks to our commitment to the Triple Lock, 12 million pensioners will get an increase of up to £470 a year and our efforts to boost Pension Credit take up mean that over 57,000 extra pensioner households were awarded the benefit, worth on average £4,300 a year.”
Liberal Democrat Deputy Leader Daisy Cooper MP condemned the policy as “yet another unfair measure that will penalise pensioners and hammer the low-paid.”
