Every single state pensioner in the UK will be forced into paying income tax for the first time under current government plans, according to a stark warning from the Institute for Fiscal Studies.
The Tipping Point for Pensioner Taxation
The analysis reveals a fundamental shift is coming. By the 2027-28 tax year, the full new state pension is projected to exceed the personal tax allowance. This means the entire state pension will become taxable income, pushing all retirees who receive it over the income tax threshold.
Currently, the full new state pension stands at £11,973, allowing pensioners with no other income to remain outside the tax system. In 2022-23, under half of those on the full new state pension were taxpayers. The IFS projects this figure will jump to 100% within three years if policies remain unchanged.
Chancellor's Freeze Creates Widespread Impact
This dramatic change is a direct consequence of Chancellor Rachel Reeves' decision to extend the freeze on income tax thresholds. The policy, which also affects benefits claimants and minimum wage earners, is proving to be a substantial revenue raiser for the Treasury.
The IFS report states that freezes to the basic (20%) and higher (40%) rate income tax thresholds alone are expected to raise £39 billion annually by 2029-30. This enormous figure is roughly equivalent to increasing all income tax rates by 3.5 percentage points.
"Freezes to the thresholds mean that, all else equal, anyone paying income tax or NICs will see their taxes increase," the Institute confirmed.
Complex Consequences for Retirees and Government
The implications extend far beyond simply paying more tax. Millions of pensioners with low incomes will face the additional administrative burden of dealing directly with HMRC to settle their tax affairs for the first time.
In a paradoxical twist, the IFS notes that many single pensioners receiving only the state pension could become eligible for pension credit and associated benefits like the free TV licence. This would occur because their after-tax income would fall below the means-tested benefit threshold, potentially creating both administrative complexity and additional fiscal costs.
Furthermore, the change alters the dynamic of future state pension increases. The government will recoup a larger portion of any rise through higher tax receipts, making increases less costly for the Treasury but also less beneficial for pensioners.
Unless the government intervenes with a specific exemption, every retiree receiving the full new state pension will experience this tax increase, marking an unprecedented shift in how pensioners interact with the tax system.
