Millions of UK pensioners are facing increased tax burdens due to a freeze on income tax allowances and thresholds, a policy initially implemented by Rishi Sunak and continued by subsequent chancellors. This 'fiscal drag' means that as incomes rise with inflation, more individuals are pulled into the tax net, even if their purchasing power hasn't increased.
According to a Freedom of Information request cited by former pensions minister Steve Webb, the number of pensioners paying the highest rates of tax has nearly doubled, rising from just under 500,000 in the 2021-22 tax year to one million this year. Overall, approximately 9.6 million Britons over pension age are now taxpayers, a significant increase from 6.7 million a decade ago.
The freeze on the basic rate allowance, set at £12,570, is projected to continue until at least the 2030-31 tax year. If allowances had kept pace with inflation, the threshold would have risen by £4,870 to £17,440 by that time, according to the Institute for Fiscal Studies. This policy, combined with an aging population and the triple lock on state pensions, means that individuals relying solely on the full new state pension could face income tax for the first time starting next April.
The freeze is characterized as a 'stealth tax' because it does not alter headline tax rates, making its impact less immediately obvious. For less affluent pensioners, the effect is considered particularly detrimental, potentially leading to falling living standards. The government has also been criticized for allowing speculation to persist regarding potential cuts to tax-free lump sums from pension pots, which has reportedly prompted some individuals to withdraw funds prematurely.
As the tax freeze continues, the administrative burden on His Majesty's Revenue and Customs is expected to increase as more pensioners face tax liabilities. Beyond the fiscal drag, previous government actions have included taxing some pension savings under inheritance tax rules.
Constructive policy options have been suggested, including making tax reliefs for pension schemes conditional on a percentage of investment in UK assets to support domestic growth. Additionally, over-funded local authority retirement schemes could implement contribution holidays and reinvest funds into local needs such as social care or housing. A significant reform proposed involves public sector pensions, where new employees could be offered defined contribution plans similar to those in the private sector, addressing a substantial taxpayer liability.