Millions more over 60s will pay income tax by 2027 (2025)

Nearly half of the 17.9 million Britons set to be dragged into paying income tax by 2027/28 will be over 60s and pensioners, new figures have revealed.

Freedom of Information data obtained by financial services firm Quilter from HMRC shows the Government’s ongoing freeze on income tax thresholds will pull millions more into the tax system over the next three years – many for the first time.

The analysis lays bare the scale of so-called ‘fiscal drag’ since 2022/23 with 8.2 million of those affected being over the age of 60.

Chancellor Rachel Reeves is to keep thresholds frozen until 2028/29, after which she has pledged to begin raising them in line with inflation.

This means that under Labour, the freeze will bring an extra 11.6m into the basic rate of tax, 5.4m of whom will be over the age of 60 and 3.4m aged over 70.

As pensions, including the state pension, rise with inflation but tax thresholds remain static, millions of retirees will soon find themselves paying tax on income once considered too low to be taxed.

Rachael Griffin, tax and financial planning expert at Quilter, said: “This is a stealth tax in everything but name.

“The number of people expected to pay income tax for the first time, or at a higher rate, by 2027/28 is set to rise exponentially due to the continued freeze on tax thresholds.”

Originally intended to run until 2025/26, the threshold freeze was extended by two years, meaning by 2027/28 an additional 17.9 million people will pay tax, compared to before the freeze was initiated.

Of these, a striking 11.6 million will be dragged in during the final three years of the freeze, from 2025 to 2028.

In total, 12 million more people will become higher rate taxpayers by 2027/28, while two million will find themselves paying the additional rate.

The vast majority of this shift will also take place between 2025 and 2028, amplifying the financial burden on households already struggling with the cost of living.

The policy’s reach is particularly stark when it comes to retirees, many of whom are now seeing their state pension growth nudging them over the £12,570 personal allowance.

April’s annual increase saw state pensions rise to £12,014. Under the ‘Triple Lock’ – which specifies that it should go up by the same rate as inflation, average growth in wages or 2.5 per cent – whichever is the highest economists forecast that the new state pension will exceed the personal allowance from next April.

Even if that proves incorrect, it will inevitably be higher from April 2027 because the minimum annual increase of 2.5 per cent would be enough to put it over the threshold.

The government has committed to the Triple Lock for the duration of this Parliament. But voices are increasingly calling for it to be reformed following generous pension hikes of 8.5 per cent in 2024 and 10.1 per cent in 2023 due to high inflation.

Earlier this month the government refused to reveal how many older people will be paying tax for the first time in retirement once the default rate of the state pension climbs higher than the income tax threshold.

Asked by an MP how many more pensioners would be paying income tax in future as a result of the freeze, Treasury minister James Murray said: “The Government is committed to ensuring that older people are able to live with the dignity and respect they deserve, and the state pension is the foundation of state support for older people. The Government is committed to the triple lock for the duration of this parliament, and in April 2025, the basic and new state pension will increase by 4.1 per cent.”

Pensions are a particularly sensitive point for Labour who used the increase in part of their defence for the highly controversial scrapping the Winter Fuel Allowance for millions.

Without any uprating of the thresholds, even modest increases in pension income are enough to trigger tax liability.

Ms Griffin added: “Even without an explicit tax rise, the Government will continue to collect more from taxpayers each year by keeping thresholds static.

“As the state pension rises while the personal allowance remains stagnant, many pensioners will soon find themselves having to pay back a proportion of their state pension.”

People can earn up to £12,570 a year before having to pay income tax with millions already not earning enough to fall into the net.

The mounting fiscal pressure comes as Chancellor Rachel Reeves faces renewed warnings from top economists that further tax rises could be inevitable – or even necessary.

Paul Johnson, director of the Institute for Fiscal Studies (IFS), has floated the idea of increasing the basic rate of income tax for the first time since 1975 in response to economic uncertainty, including the risk of a global trade war under Donald Trump’s presidency.

Mr Johnson told Times Radio: “It would not be daft to think about doing something that no one has done for the last 50 years.

“And that is to increase the basic rate of income tax, which is probably less economically damaging than an awful lot of other things she might think about doing.”

He warned that Reeves’ “iron-clad” fiscal rules, which prohibit borrowing for day-to-day spending and require debt to fall as a share of national income within five years, are already limiting her options.

In her recent spring statement, the Chancellor was forced to slash billions from the welfare budget to maintain compliance with these rules – cuts which, critics warn, could drive hundreds of thousands of households into poverty.

Meanwhile, the Office for Budget Responsibility (OBR) has warned that Trump’s promised trade tariffs could wipe out the £9.9bn fiscal headroom Reeves had set aside.

Mr Johnson wrote in The Times: “Chancellors have raised VAT, national insurance, and corporation tax.

“But the basic rate? For 50 years, chancellors have moved heaven and earth first to cut it to its current 20 per cent and then to avoid increasing it.”

He also pointed to the political challenge Reeves faces, noting that Labour has pledged not to raise taxes on working people.

However, the growing number of individuals being caught in higher tax bands thanks to threshold freezes is testing that promise.

During her 2024 Autumn Budget, Reeves ruled out extending the freeze until 2030, admitting it would “hurt working people” and clash with Labour’s manifesto.

Instead, she pledged to return to uprating personal tax thresholds with inflation from 2028/29.

Still, speculation persists that the Chancellor could reverse course under mounting fiscal pressure.

Ms Griffin said: “Given the challenging fiscal position, there have been rumours that the Chancellor might backpedal and opt to freeze income tax thresholds until 2030.

“However, given the likely backlash and the Government’s commitment not to raise taxes for working people, this seems unlikely.”

She urged taxpayers, and especially retirees, to consider financial planning options to mitigate the tax hit, adding: “Strategic financial planning has never been more important.

“Some will be able to mitigate their tax burden with options such as salary sacrifice arrangements and increasing pension contributions, whereas retirees should explore how they are taking income to ensure they are not paying more tax than necessary.”

A Treasury spokesman said: “This government inherited the previous government’s policy of frozen tax thresholds. At the Budget and the Spring Statement, the Chancellor announced that we would not extend that freeze.

“We are also protecting payslips for working people by keeping our promise to not raise the basic, higher or additional rates of Income Tax, employee National Insurance or VAT. That’s the Plan for Change – protecting people’s incomes and putting money into people’s pockets.”