The full new state pension could be just 5 years away from earning a tax bill as an income tax cap is predicted to continue. Ahead of Chancellor Rachel Reeves’ budget on October 30th, experts are expecting her to announce an extension of the freeze on personal allowance thresholds by another year or so.
By the end of the decade, in the tax year 2029/2030, retirees could see a minimum tax bill of £130 because the state pension will continuously be uprated by the triple lock mechanism while the income tax threshold remains the same. The current full new state pension is at £11,502.40 a year and is expected to rise by £460 next year based on the recent wage growth data. This leaves it at £11,962.40 against a personal allowance threshold of £12,570.;
The 2025 rise leaves just over £600 gap between the full new state pension and the personal allowance threshold that currently makes state pension tax-free. Even if state pension only rises by the minimum 2.5% promised through the triple lock each year until the personal allowance threshold is unfrozen, Quilter calculated for i that the state pension will incur a £130.20 tax bill by 2030.
if the frozen thresholds stay, State pension could first become liable for the tax in the 2027/2028 tax year although this would only spark a small bill which may be written off by HMRC if the cost of collecting it outweighs the sum owed. The Conservatives froze the personal allowance in 2021 at £12,570. This means that your total annual income is not liable for income tax until it hits this amount. The original freeze was meant to last until 2028 but experts predict the Chancellor will extend it into the next decade with the 2029/2030 tax year.
Jon Greer, head of retirement policy at Quilter, warned this potentially outcome is “particularly concerning” after the controversial Winter Fuel Allowance restrictions were implemented. The extension of these freezes also contradicts the Chancellor’s own statements last year which condemned it as “a sign of failure” and claimed the Conservatives were “picking the pockets of working people”.
While Labour’s manifesto guaranteed the taxes of working people would not be increase, including income tax rates, national insurance or VAT, this freeze could help plug the financial hole the Conservatives left. Current insights claim extending the freeze by a year would raise an estimated £7billion.