Historic Tax Change for UK Pensioners
In an unprecedented move that will affect millions, all full state pensioners in the UK are set to pay income tax on their pension for the first time in history. This significant change results from the government's decision to maintain frozen tax thresholds while state pension payments continue to increase.
The Frozen Threshold Creating a Stealth Tax
The crucial factor driving this change is the frozen personal allowance of £12,570, which hasn't increased despite rising pension values. The full new state pension from the Department for Work and Pensions (DWP) is projected to exceed this threshold for the first time, pulling all recipients into the tax net.
According to the Institute for Fiscal Studies, this represents a dramatic shift. The proportion of full state pension recipients paying income tax will jump from under 50% in 2022-23 to 100% by 2027-28.
Matthew Oulton, a research economist at the IFS, explained the broader impact: "The freezes to personal tax thresholds have already represented a huge tax rise. Extending them would increase tax on all employees working full-time, most working part-time, most minimum wage workers and many low-income pensioners."
Political Context and Expert Reaction
The policy gained attention when Chancellor Rachel Reeves, in her 4 November speech at Downing Street, indicated potential tax hikes in the upcoming autumn budget without ruling out increases to income tax, VAT, or national insurance - contrary to previous Labour pledges.
Financial expert Martin Lewis described the mechanism as "a deliberate thing to take extra tax from the public through stealth," highlighting how fiscal drag effectively increases government revenue without officially raising tax rates.
This process occurs when wage inflation pushes salaries higher while tax thresholds remain unchanged, causing earners to lose a larger share of their incomes to tax. For pensioners, the effect is particularly significant as their state pension becomes taxable for the first time in living memory.
