A recent study reveals that approximately ten million pensioners may become liable to pay income tax by the end of the decade if the freeze on tax thresholds continues until 2030.

Typically, individuals can earn £12,570 per tax year before entering the income tax bracket, known as the personal allowance, which has remained static since the 2021/22 tax year.

Currently, the freeze is set to conclude by the 2028/29 tax year, but there are indications that it could be extended until 2030 by Rachel Reeves. Research conducted by former pensions minister and LCP partner Steve Webb suggests that extending the freeze for an additional two years could result in an extra 500,000 state pensioners being subject to income tax.

This development 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. However, LCP predicts that this number could escalate to ten million pensioners paying income tax by the end of the decade if inflation or wage growth accelerates in the upcoming years.

The state pension undergoes an annual increase every April through the triple lock mechanism, which ensures that it aligns with the highest of earnings growth between May to July, September inflation, or 2.5%. It is anticipated that the full new state pension will rise from £230.25 to £241.30 per week in April 2026, reflecting a 4.8% wage growth, with specific details to be disclosed in the Budget.

At the onset of the freeze in 2021/22, the new state pension was roughly 75% of the tax threshold. However, by 2027/28, even with a mere 2.5% triple lock increase in the state pension, LCP projects that the new state pension will surpass the tax threshold by 102%.

Steve Webb from pension consultants LCP commented that a combination of stagnant tax thresholds and high inflation has resulted in a surge of pensioners being subject to tax payments, including a significant increase in those liable for taxes at 40% or higher.

If the Chancellor opts to extend the freeze for an additional two years, it is expected that a minimum of half a million more pensioners would fall into the tax bracket, bringing the total to around 9.3 million, constituting three-quarters of all pensioners. As inflation or wage growth accelerates, the total number of pensioners paying taxes could reach ten million by the decade’s end.