Frozen income tax thresholds are having a growing impact on UK pensioners, dragging millions into the tax system through “fiscal drag”. Although tax rates themselves have not risen, the personal allowance has been frozen at £12,570 since 2021, while pensions and wages have increased with inflation. As a result, many pensioners are now paying tax for the first time, despite seeing little or no real improvement in their living standards.
According to the Institute for Fiscal Studies (IFS), the number of pensioners paying income tax has risen sharply in recent years. Around 6.7 million pensioners paid income tax in 2021–22, but this has increased to approximately 8.8 million pensioners by 2025–26. Forecasts suggest that as many as 9.3 million pensioners (around three quarters of all pensioners) could be paying income tax by 2030 if thresholds remain frozen. The IFS has also warned that by 2027–28, the full new State Pension will exceed the personal allowance, meaning pensioners relying solely on the State Pension could become taxpayers for the first time.
Had the personal allowance increased in line with inflation since 2021, analysts estimate it would now be worth around £15,000 to £17,000, rather than £12,570. This means pensioners are effectively facing a stealth tax increase simply because thresholds have failed to keep pace with the cost of living.
At CSPA, we believe this is unfair. Pensioners on modest fixed incomes should not be penalised through frozen tax thresholds while everyday costs continue to rise. As part of our Later Life Ambitions Budget for Later Life, we are calling for income tax thresholds to increase in line with inflation to prevent unfair real-terms tax rises, including a significant increase in the basic income tax threshold based on the Bank of England’s inflation calculator. We also want to see continued protection of the 25% tax-free pension lump sum, giving retirees greater financial security when accessing their pension savings, alongside safeguarding ISAs and other tax-free savings platforms. Together, these measures would help protect older people from being dragged unnecessarily into the tax system.
Sources:
IFS (Institute for Fiscal Studies), report on frozen tax thresholds
House of Commons Library, Income tax threshold freeze briefing
IFS analysis, report on frozen thresholds and fiscal drag
