Stealth Tax Alert: All Full State Pensioners to Pay Tax on Their Payments by 2027-28
A new analysis from the Institute for Fiscal Studies (IFS) warns that every full state pensioner will be paying income tax by 2027-28, marking a significant shift in pensioner taxation. Currently, fewer than half of state pensioners pay tax on their pension income, but this is set to change dramatically within just five years.
The government’s decision to freeze tax thresholds while the state pension value rises is the driving force behind this change. As a result, the full new state pension is expected to surpass the £12,570 personal allowance for the first time in history. This fundamental shift in tax treatment will see the proportion of full state pension recipients paying income tax rise from under 50% in 2022-23 to 100% by 2027-28, according to the IFS.
In last year’s budget, Chancellor Rachel Reeves stated that freezing tax thresholds would ‘hurt working people,’ but she is now expected to reverse this stance due to the poor state of 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 changing headline tax rates.
The IFS analysis reveals that extending the freeze by two years to April 2030 would raise £8.3 billion in that single year. The think tank emphasizes that the threshold freeze has already significantly impacted who pays income tax and how much they pay. Critics describe this as a ‘stealth tax’ on pensioners, as it operates as a hidden tax despite the lack of a direct increase in headline tax rates.
The impact of frozen tax thresholds goes beyond income tax collection. Single pensioners relying solely on the state pension may become eligible for pension credit if their net income falls below benefit thresholds, leading to additional entitlements like free TV licences. This creates administrative challenges for both the government and older people who must navigate complex benefit systems.
The development significantly diminishes the value of wage increases for lower-paid workers, as the Treasury claims a larger share of each pay rise through taxation. The IFS criticizes 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.’
A Treasury spokesperson defended the government’s position, highlighting the commitment to the Triple Lock, which provides pensioners with increases of up to £470 a year, and the efforts to boost Pension Credit, benefiting over 57,000 extra pensioner households.
Liberal Democrat Deputy Leader Daisy Cooper MP criticized the policy, calling it ‘yet another unfair measure that will penalize pensioners and hammer the low-paid.’