Pensioners have been warned that millions are being dragged into the tax system. The personal allowance has been frozen at £12,570 since 2021, but pensions and wages have increased with inflation. A campaign group has said that, many pensioners are now paying tax for the first time as a result, despite them “seeing little or no real improvement in their living standards”.
“Pensioners on modest fixed incomes should not be penalised through frozen tax thresholds while everyday costs continue to rise,” the Civil Service Pensioners Alliance (CSPA) said.
About 6.7million pensioners paid income tax in 2021–22, according to Institute for Fiscal Studies (IFS) data. But this had increased to approximately 8.8million pensioners by 2025–26, and predictions suggest that as many as 9.3million pensioners – around three quarters of them – could be paying income tax by 2030, if thresholds remained frozen. It is also thought that, by 2027–28, the full new state pension will exceed the personal allowance, meaning pensioners relying solely on the former could become taxpayers for the first time.
Had the personal allowance increased in line with inflation since 2021, estimates suggest that it would now be worth around £15,000 to £17,000.
“This means pensioners are effectively facing a stealth tax increase simply because thresholds have failed to keep pace with the cost of living,” the CSPA said.
The organisation added that income tax thresholds should increase in line with inflation in order to prevent “unfair” real-terms tax rises.
This would include an increase in the basic income tax threshold, based on the Bank of England’s inflation calculator, it added.
In addition, CSPA insisted that there must be continued protection of the 25% tax-free pension lump sum, which gives retirees “greater financial security when accessing their pension savings, alongside safeguarding ISAs and other tax-free savings platforms”.
“Together, these measures would help protect older people from being dragged unnecessarily into the tax system,” it added.
The basic and new state pension increased by 4.8% from April 2026, in line with earnings growth, meaning over 12million pensioners will gain up to £575 each in 2026-27, the Treasury emphasised.
The pension credit standard minimum guarantee was also uprated by 4.8%.