Half a Million Pensioners Could Face New Tax Hit

This is according to modelling by Steve Webb, partner at pensions consultant LCP and former Liberal Democrat pensions minister.

This means the number of government pensioners paying income tax will rise from around 8.7 million today to around 9.3 million, accounting for three-quarters of all pensioners, Webb's research suggests.

The number of pensioners paying tax is likely to rise to 10 million by the end of this decade, depending on how inflation and salary growth play out in the coming years.

After abandoning plans to raise income tax, Reeves is expected to extend the income tax threshold freeze in his Autumn Budget on Wednesday (November 26) – a practice often referred to by critics as a "stealth tax."

How will this affect 500,000 pensioners?

Webb, who was Minister of State for Pensions in the Tory/Lib Dem coalition government, says that if the threshold freeze remains in place, half a million pensioners will have to start paying income tax. He says this situation will persist even if the pension age is raised from 66 to 67.

Today, most pensioners retired under the old State Pension system, with 2.5 million of them already receiving a pension that puts them above the income tax limit.

"But from 2027/28, anyone on the full rate of the new State Pension will be above the tax limit based on their State Pension alone," Webb said.

Modeling suggests that those covered by the new State Pension will be particularly affected, as around half a million people under this system are already above the tax limit due to their pension.

Webb said that longer deferrals will push people not only past the basic rate tax threshold, but also past the 40% and 45% tax thresholds.

He further noted that this year, more than 1 million pensioners will pay 40% or more tax, compared to around 500,000 four years ago.

One method the government uses to increase its income tax revenue without raising taxes is to freeze thresholds—some critics call this a "stealth tax."

This is also called "fiscal drag" because more taxpayers are "dragged" into paying tax, or forced to pay at a higher rate as their salaries rise, even though they don't benefit from inflation-related increases.

When the current freeze began in 2021/22, the new State Pension was approximately three-quarters of the tax threshold, and this gap has been steadily narrowing since then.

Webb said, "In 2027/28, even with just a 2.5% 'triple lock' increase in the State Pension, the new State Pension will be 102% of the tax threshold; in 2021/22, approximately 6.7 million pensioners were paying tax, compared to 8.7 million today."

"If inflation or salary growth continues at this rate, this could reach a total of 10 million pensioner taxpayers by the end of this decade."

Webb added, "The good news is that most of these pensioners will not need to file a tax return."

"Any tax they owe will usually be collected on their private pension through the tax code or a 'simple assessment' process, where HMRC uses information it already holds to create a tax bill."

What has the reaction been?

Caroline Abrahams, director of Age UK, told Yahoo News that "essentially," the senior citizens charity would oppose any move that would "affect pensioners on low and modest incomes."

She added, "The continued freezing of the Personal Allowance for Income Tax falls into this category."

"Prices of essential commodities are constantly rising, so it's already becoming difficult for older people to make ends meet: they need more support, not less, and we hope the budget will take steps to help with their living expenses so that no pensioner is left behind.

"We believe the personal allowance for income tax should be unfrozen for everyone, as maintaining it at a time when prices are constantly rising harms people of all ages who are not receiving as much money."

"It doesn't make sense for the government to give older people money in the form of their pensions with one hand, and take some of it away with the other."