More than one million additional pensioners are expected to pay income tax by 2031 after the Government extended the freeze on tax thresholds, according to new forecasts from the Office for Budget Responsibility (OBR).
Chancellor Rachel Reeves confirmed in her Budget that the freeze, first introduced in 2022, will remain in place until 2031. The move, described by critics as a “stealth tax” means that as pensions and wages rise, more people will fall into the tax net despite no change to headline tax rates.
8.7 million pensioners will pay income tax this year
The OBR’s latest figures reveal that HMRC has significantly underestimated the number of retirees affected. By the 2026-27 tax year, an extra 600,000 pensioners will be paying income tax, rising to over one million by 2030-31. Collectively, they will contribute around £100 million more in tax – a modest average of about £100 per person, but a meaningful shift for pensioners on fixed incomes.
City analysts suggest the true number may be even higher, as many retirees receive modest private pensions or investment income that push them over the tax-free threshold.
State pension to breach tax-free allowance
The new full state pension, currently £11,973 a year, is due to rise to £12,547 in April under the triple lock guarantee, which increases payments in line with inflation, wage growth, or 2.5%. This will nudge the benefit just above the frozen personal allowance of £12,570, meaning millions will begin paying tax on their state pension income from next year.
The OBR’s forecast shows that roughly 8.7 million pensioners will pay income tax this year, and that figure is set to climb sharply with each annual triple-lock rise.
After last November’s Budget, Reeves stated that “no pensioner receiving just the new state pension” would pay tax, but Treasury officials have yet to explain how that exemption would work in practice. Sources suggest the delay reflects the complexity of separating state and private pension income for tax purposes.
Former pensions minister Baroness Ros Altmann called the situation “administratively a bit of a nightmare,” while Sir Steve Webb, who served under the coalition government between 2010 and 2015, said the forecasts “strengthen the case for a full review of the starting point of income tax, especially for pensioners.”