Jessica BirdAegon has warned that extending the freeze on income tax thresholds to 2031 will draw millions more people into paying tax or into higher tax bands, after the Chancellor confirmed the measure during the Autumn Statement.
Steven Cameron, Pensions Director at Aegon, said the decision represents a significant increase in the overall tax burden, despite no rise in headline rates.
He said: “Extending the freeze to 2031 is a major blow for taxpayers. It means thresholds will have been fixed for an astonishing nine years, pulling millions more into paying tax, or paying at a higher rate. By stealth, this increases the tax burden albeit without any actual rise in headline rates.
“OBR projections were already predicting that by 2028, millions more would be paying income tax, with significant growth in higher and additional rate taxpayers. The 3-year extension will add further millions to this. For those moving into higher tax bands, paying extra income into a pension could soften the blow by securing 40% tax relief.
“Surprisingly, the Chancellor has said those with only the old or new state pension will not be subject to income tax even if their income exceeds the frozen personal allowance.
“From April 2027, the full new state pension will be at least £12,861, exceeding the £12,570 allowance, which would otherwise have triggered a tax charge of at least £58 a year.
“The extended freeze means both the excess and the potential tax bill would have risen annually, which would have been perceived as the government giving with one hand and taking with the other. By 2030/31 the tax bill might have risen to over £500 per year.
“It’s very welcome that the Chancellor has confirmed state pensioners with no other income will not face a tax charge even if their income exceeds the frozen thresholds.”
