Chancellor needs to intervene on pension tax, Webb warns

Chancellor needs to intervene on pension tax, Webb warns

Half a million pensioners will be dragged into the income tax net for the first time next year without government help, Steve Webb has said.

A combination of the increase in pensions next April and the frozen income tax threshold will mean the number of pensioners paying income tax will rise from 7.3mn to 7.7mn next year, according to LCP, where Webb is a partner.

The former pensions minister has urged chancellor Kwasi Kwarteng to review the income tax freeze.

Article continues after advert

“Freezing tax thresholds is a stealthy way of raising tax at the best of times, but at a time of soaring inflation, freezing thresholds has a profound effect,” Webb said.

“If the chancellor is looking for ways to cut taxes and ease cost of living pressures on those on modest incomes, he could do worse than review the long-term freeze of income tax allowances”.

Former chancellor Rishi Sunak announced last year that the income tax personal allowance and higher rate threshold would be frozen from the 2022/23 tax year until the 2025/26 tax year.

Number of pensioners paying income tax


Number of taxpayers aged 65+ (thousands)









Source: HMRC/LCP

The state pensions is expected to rise in line with CPI inflation in the year to September 2022, which was 9.9 per cent in August.

Many occupational pensions will be increased due to inflation, LCP said, though the rules on the amount vary.

Public sector pensioners will see an uplift equal to RPI inflation, which tends to run higher than CPI, whereas private sector occupational pensioners tend to see their rises bound by a cap.

Data from HMRC released in June shows that the number of higher rate taxpayers is set to reach almost 5.5mn in 2022/23, an increase of 44 per cent compared with pre-Covid times of 2019/20. 

In 2019/2020, this figure stood at around 3.8mn.

In addition, the number of the very highest earners paying 45 per cent income tax will increase to 629,000, compared to 421,000 in 2019/2020 - a rise of 49.4 per cent. 

The Treasury has been approached for comment.