Chancellor, Rachel Reeves, is set to extend the freeze on income tax thresholds until the end of 2029/30, forecasting from the Office for Budget Responsibility (OBR) has revealed, in a move that is set to "drag" millions more pensioners into paying tax.

The OBR's forecast also included plans to charge national insurance on salary sacrifice pensions, in a move that is expected to raise £4.7bn.

The former government froze the UK personal income tax allowance at £12,570 in 6 April 2022, with further extensions since meaning it this is still in place.

The number of pensioners paying tax has already increased significantly as a result of the freeze, as modelling by LCP partner, Steve Webb, revealed that, in 2021/22, when the freeze started, there were around 6.7m pensioners paying tax, compared with 8.7m today.

Confirmation of the continued freeze on allowances could prove problematic for many pensioners, particularly following the news that the state pension is set to increase by 4.8 per cent under the triple lock, as also confirmed in the Budget.

Indeed, Webb's modelling revealed that, if the Chancellor were to extend the freeze on income tax thresholds for another two years, this would mean an extra half million state pensioners paying income tax, even when allowing for the increase in pension age from 66 to 67.

This means at least 9.3 million pensioners paying tax, representing around three-quarters of all pensioners, compared with around 8.7 million today.

However, if inflation or wage growth picks up in the coming years, leading to larger state pension rises, Webb found that there could "easily" be 10 million pensioners paying income tax by the end of the decade.

This builds on previous research from the Institute for Fiscal Studies (IFS), which showed that, without an exemption, pensioners with low incomes will be required to begin paying tax directly to HMRC from 2027, creating an administrative burden for millions.

This has also prompted concern in the political sphere, as Liberal Democrat Spokesperson and Deputy Leader, Daisy Cooper MP, warned that this "stealth tax is yet another unfair measure that will penalise pensioners and hammer the low-paid".

Salary sacrifice changes are also likely to prove unpopular, as industry experts previously rallied behind the calls for Reeves to reconsider changes to salary sacrifice, pointing out that even the government's own research suggesting that this could damage morale around pension saving.

The pensions industry is not alone in the call against salary sacrifice changes, as the Federation of Small Businesses also co-signed a letter to the Chancellor urging her to reconsider changes to pension tax or salary sacrifice.

In addition to this, research from the ABI and Reward and Employee Benefits Association (REBA) found that, if the government were to introduce a £2,000 threshold on salary sacrifice for pension contributions, 31 per cent of businesses would reduce their contributions to an employee’s pension, and 45 per cent would reduce other employee benefits and services.

Commenting on the changes, Society of Pensions Professionals chair of the tax group, Steve Hitchiner, said: “Abolishing salary sacrifice for pensions will affect the take home pay of millions of employees – especially basic rate taxpayers – and is a tax on working people, in spirit if not in name.

"It is also another sizeable cost to employers and, perhaps most importantly its removal will reduce pension saving.”

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