Up to 1.5 million British pensioners could be dragged into paying higher tax from this year, as Rachel Reeves plans a major stealth tax hike.
The Chancellor is scrambling to find extra sources of cash ahead of the Budget so she can fund Labour’s manifesto pledges.
One move would be to continue the freeze in income tax thresholds, which would raise billions for the Treasury as pay rises and inflation mean more are dragged into the higher rate and top rate of income tax, while not noticing it’s the government’s fault.
However this policy will also hit as many as 1.5 million pensioners, according to new analysis by wealth management company Quilter.
The threat comes in addition to warnings during the general election that for the first time ever those on the state pension will be dragged into paying income tax for the first time ever.
The state pension is currently £11,502, but this is on course to rise by £460 from April 2025, taking those in receipt dangerously close to the current tax threshold of £12,570.
A further rise in 2026 would tip millions of pensioners into paying tax for the first time.
Charities for older people have now said that Rachel Reeves’ tax threshold will hurt pensioners who are already “trying to stretch their low incomes”.
Retirees will be forced to find a spare £300 this winter after the Government took the controversial decision to strip most pensioners of Winter Fuel Allowance, in addition to rising energy costs and the general cost of living crisis.
Tax thresholds have been frozen since 2021, however Labour’s manifesto pledged to not raise taxes on “working people”, something continuing to freeze the rates may breach.
The thresholds are not expected to resume rising with inflation again until 2028.
Quilter’s Jon Greer told the i newspaper: “If Labour decides to keep income tax thresholds frozen until 2030 it could potentially drag 1-1.5 million extra pensioners into higher or additional rate tax brackets.
“[It is] a move that would boost government coffers by stealth while allowing Labour to maintain that it has not increased the headline rate of income tax.”
A Freedom of Information request by the firm revealed that 3.1 million pensioners are already set to be dragged into paying either the 40% or 45% tax rate by 2027/8 due to the existing thresholds freeze.
Caroline Abrahams, charity director at Age UK, said: “It would be disappointing if the Chancellor declines to raise personal allowances for income tax at the Budget, since this would take us closer to a situation in which pensioners whose only income is their state pension become liable to pay this tax.
“It makes no sense for the state to give older people money with one hand while taking it away with the other, but that’s where we are heading as things stand.
“What’s more, the value of the state pension is modest, particularly when compared to that in other similar countries, and older people who depend on it as their sole source of income cannot afford any deductions if they’re to live decently.”