State pensioners are set to face higher tax bills due to the government’s decision to freeze tax thresholds for an additional three years—a move that has alarmed finance and pension experts alike. Chancellor Rachel Reeves, representing the Labour Party, announced this extension, which will now keep thresholds frozen until 2031.
Caroline Abrahams, charity director at Age UK, expressed deep concern over the freeze, stating it will “drag more older people into paying income tax,” including those with low and modest incomes who already struggle to maintain a reasonable standard of living amid rising prices for essentials like food, energy, and housing.
Abrahams described the government’s decision as “deeply regrettable,” emphasizing that the freeze’s prolonged duration severely impacts pensioners' financial stability. She also highlighted the importance of maintaining the triple lock—a mechanism ensuring state pension increases—especially at this time of elevated living costs.
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The government has acknowledged the potential tax burden on pensioners, announcing plans to explore ways to exempt them from paying small amounts of income tax when state pensions exceed the personal allowance starting in the 2027/28 tax year. Beginning next April, the full flat-rate state pension will increase by 4.8% to £12,548 annually, just below the income tax threshold of £12,570, which will remain frozen until at least 2030/31.
However, former Liberal Democrats Pensions Minister Steve Webb warns that the government’s proposal risks being both unfair and unworkable. Webb points out that while some pensioners might avoid paying around £58 in tax if the pension rises by 2.5% in spring 2027, millions already receive pensions above the tax threshold and receive no similar relief.
He criticizes the plan for potentially favoring pensioners without private pensions over those with small private pensions, unfairly penalizing savers. Furthermore, under these rules, a pensioner marginally above the tax threshold could pay no tax, while an employee with the same income would be liable for both tax and National Insurance contributions—raising questions about fairness.
Webb also notes the absence of detailed costing for this policy in the Budget documents, suggesting it remains an early concept rather than a finalized plan. He cautions that designing a system that is both fair and feasible will present significant challenges for the Treasury.