Concerns over the impact of frozen tax thresholds have continued to grow, after the Institute for Fiscal Studies (IFS) warned 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.

The IFS' research pointed out that, for the first time since its introduction, the full new state pension is set to exceed the personal allowance in 2027/28, meaning that many more pensioners will be required to pay income tax if the Chancellor chooses to extend the freezes.

Indeed, whilst just under half of those on the full new state pension in 2022/23 were taxpayers, the IFS warned that, by 2027/28, that figure will be 100 per cent. 

In addition to this, the IFS said it is possible that many single pensioners who are in receipt only of the full state pension could become eligible for a small amount of pension credit (a means-tested benefit) because the tax payment will push their after-tax income below the pension credit threshold. 

Given that many other entitlements, including the free TV licence, are passported from pension credit, this could also impose material administrative costs and be fiscally costly.

The IFS said that while it will also make future increases to the state pension less costly overall for the government, they will be less beneficial to pensioners, since a larger fraction of state pension increases will be returned to the exchequer via higher tax. 

"Reducing the real value of tax thresholds is not an unreasonable way to raise revenue," the IFS stated.

"If the Chancellor does choose such a course, however, she should do so because she favours the model of personal taxation that such a policy entails – one in which the lowest incomes (including those of pensioners with no private pension income, minimum wage workers, and workers receiving universal credit) are increasingly subject to tax and where a rising fraction of employees are subject to higher rates of tax – not because she believes such a change would be less likely to be noticed by taxpayers.

"What is more, if the Chancellor does wish to reduce tax thresholds, extending the cash freezes is a poor way of achieving such an aim. Freezes mean that the real value of thresholds, and the amount of revenue raised, are determined by the (uncertain) path of future inflation. 

"Rather than specifying nominal thresholds and letting the vagaries of inflation determine their real value, Reeves would be far better advised to do the reverse: she should specify the real value she thinks thresholds should be set to, and adjust nominal thresholds in light of what happens to prices."

The Liberal Democrats also warned against continued freezes, with Liberal Democrat Spokesperson and Deputy Leader, Daisy Cooper MP, stating: “The government’s stealth tax is yet another unfair measure that will penalise pensioners and hammer the low-paid.

“Labour needs to set out fairer alternatives and stop being the continuity Conservatives.

“Years of sluggish growth is what caused the Chancellor’s black hole in the first place, so the best way to repair it is to get our economy growing strongly again. A new UK-EU customs union would do just that, unleashing British businesses and bringing in billions for the public purse.”

Asked recently about the impact of frozen personal tax thresholds on pensioners’ disposable incomes in a written question from Plaid Cymru MP for Caerfyrddin, Ann Davies, Pensions Minister, Torsten Bell, said: "The previous government made the decision to freeze the income tax personal allowance at its current level of £12,570 until April. 

"The previous government published a Tax Information and Impact Note setting out the impacts."

---