The freeze on thresholds will mean that by 2027, everyone receiving the new state pension will be charged income tax
Pensioners and workers on the minimum wage are being sucked into paying income tax by a freeze on tax thresholds, a think-tank has warned.
The freeze on thresholds – seen as a form of “stealth tax” – will mean that by 2027, everyone receiving the new state pension will be charged income tax, according to the Institute for Fiscal Studies (IFS).
Most income tax and national insurance contribution thresholds were frozen under the previous Conservative government in April 2023, with the freeze currently set to expire in 2028.
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While Rachel Reeves said in last year’s Budget that she had opted against extending the freeze because it would “hurt working people,” she is widely expected to U-turn on that decision in the Budget, in two weeks’ time, because of the parlous state of the national finances.
Freezing thresholds raises extra tax revenue for the Government because inflation and wage growth push more people into higher tax brackets or over the personal allowance.
According to new analysis by the IFS, if Reeves were to extend the threshold freeze by another two years to April 2030, it would raise £8.3bn in that year.
The think-tank said that the freeze had already had an enormous impact on who pays tax and at what rates.
For example, for the first time ever, the full new state pension is set to rise above the income tax personal allowance threshold in 2027.
In 2022-23, just under half of those on the full new state pension paid tax on their incomes, but by 2027-28, the figure will be 100 per cent.
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As well as pensioners, more minimum wage workers are being pulled into income tax by the threshold freeze.
Discussing freeze on thresholds, a Treasury spokesman said: “We will deliver a Budget that boosts growth and cuts the cost of living, having already delivered a record rise to the national minimum wage and national living wage, extended the £3 bus fare cap, and expanded free school meals, breakfast clubs and free childcare.
“Thanks to our commitment to the triple lock, 12 million pensioners will get an increase of up to £470 a year and our efforts to boost pension credit take up mean that over 57,000 extra pensioner households were awarded the benefit, worth on average £4,300 a year.”