People nearing pension age might have to budget more in their retirement for taxes (Image: GETTY)
Those planning to retire in 2030 and beyond could be hit with a hefty £15,000 burden if the personal allowance tax freeze is extended, new data reveals. The increased cost of maintaining their current lifestyle is due to fiscal drag, a result of rising state pensions, escalating living costs and frozen personal allowances.
According to Pensions UK’s latest Retirement Living Standards report, a single pensioner currently requires an annual income of around £43,900 for a comfortable retirement. However, this figure is expected to skyrocket to over £58,800 in just five years’ time to maintain the same standard of living.
It’s crucial to highlight that this £14,960 increase is projected by 2030 if the freeze on personal allowance and income tax thresholds continues.
Currently, the personal allowance permits most people to earn £12,570 each year before they’re subject to income tax. However, this has been frozen until 2028, and Sir Keir Starmer hasn’t dismissed the possibility of extending this freeze even further, according to the Telegraph.
During Prime Minister’s Questions on Wednesday, the PM reassured that he intends to honour Labour’s manifesto pledge not to hike taxes for working individuals. Yet, he sidestepped questions about whether the halt on income tax thresholds would continue beyond 2028.
Widely recognised by specialists as a ‘stealth’ tax, the freeze doesn’t increase taxes. Instead, as incomes and benefits rise over time with inflation, it passively nudges people into higher income tax brackets.
This phenomenon, also known as fiscal drag, could even render the state pension taxable in the future. While the state pension isn’t inherently exempt from income tax, it currently falls under the personal allowance threshold, thus escaping taxation.
With the triple lock guaranteeing a minimum annual increase of 2.5% and the current full new state pension amount at £11,973, it’s possible that retirees would have to pay tax on their state pension income alone in the next few years if the freeze persists.
Alan Barral, financial planner at Quilter Cheviot, told the Telegraph: “Frozen income tax thresholds may feel like a technical detail, but they have real consequences for retirees whose standard of living is being squeezed.
“With the UK facing significant fiscal challenges, there’s a real risk that Rachel Reeves may feel compelled to backtrack on Labour’s pledge to unfreeze thresholds.”
A government spokesman told the outlet: “We are committed to helping our pensioners live their lives with dignity and respect, which is why in April the basic and new state pension increased by 4.1pc.
“Pensioners will receive a boost of up to £470 to their income in 2025-26. Our commitment to the triple lock means millions will see their pension rise by up to £1,900 this parliament.”
Claimants born after 1951 could be due an extra £657 from April
State pensioners could receive extra cash next year (Image: Getty Images)
State pensioners born after 1951 could be in for a £657 boost under the proposed Triple Lock projections, with the Department for Work and Pensions (DWP) set to increase payments. The full new State Pension in the UK for the 2025/26 tax year stands at £11,973 annually, or £230.25 weekly.
However, with the Triple Lock’s earnings growth element currently at 5.5%, those eligible for the full state pension, including men born post-1951 and women born post-1953, might see their weekly payments climb to £242.90.
This would translate to a four-weekly payment of £971.60, totalling an annual sum of £12,630.80. The Triple Lock ensures that DWP payments rise each year by the highest of either average annual earnings growth from May to July, CPI in the year to September, or 2.5 % .
These projections come against a backdrop of a 0.1% dip in UK growth in May 2025, as reported by the Office for National Statistics (ONS). Nonetheless, GDP saw a 0.5% rise over March to May 2025, slightly surpassing the 0.4% forecast, reports Birmingham Live.
Professor Joe Nellis from MHA commented on the economic situation: “This is a far cry from the strong growth in the first quarter of the year when a surge in exports and a robust performance in the services sector placed the UK among the G7’s top performers.”
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He added: “Growth over the first half of the year is now expected to be modest.
“Despite a more positive outlook for the remainder of the year, this presents a challenge to the Chancellor – her fiscal headroom remains limited by high levels of public borrowing and debt and her spending plans are heavily reliant on kickstarting the economy.
“Just as last year, we now wait tentatively for the Autumn Budget to find out how the Chancellor aims to solve her fiscal problems.”
Mr Nellis added: “Something must change – she must either cut spending, increase borrowing, or raise taxes. We expect a squeeze on unprotected Government budgets to cut spending, but the recent rebellion in the Labour Party against the welfare reform bill shows that major spending cuts may be too politically dangerous for the Government.
“The OBR’s July report highlighted the intense burden that the triple lock on the state pension places on the UK economy – demographic and economic shifts have made this policy difficult to uphold, but any attempt to undo it would move the Government into treacherous waters.”
