New State Pension Tax Threat: Rachel Reeves' Upcoming Income Raid

In a move that could impact millions of state pensioners, Chancellor Rachel Reeves is reportedly planning an extended income raid in her upcoming Spring Statement on March 26. This decision comes as Reeves struggles to balance the books following her controversial autumn Budget.

Despite taxing and borrowing to the tune of £70 billion, Reeves' figures still don't add up. With limited fiscal headroom, she faces the tough choice of either hiking taxes again or cutting spending. Most likely, she will do both, leading to a new wave of austerity measures.

One of the most significant changes could be the extension of the freeze on income tax thresholds. The Tories initially froze the personal allowance at £12,570 in 2021 and extended it for six years to 2028. This freeze has already pushed 7.7 million people into higher tax brackets, generating an additional £45 billion in revenue. However, Reeves had previously pledged not to extend the freeze further, citing the negative impact on working people.

Now, it seems she may have to break that promise. Paul Johnson, director of the Institute for Fiscal Studies, warns that extending the tax freeze by two more years to 2030 is a top policy option being considered. This move would add more than £4,000 to workers' tax bills and significantly impact pensioners.

From April, the new state pension will rise to a maximum of £11,973 a year, thanks to the triple lock. This amount is just £597 below the personal allowance, meaning even a modest extra income from savings or a private pension could push pensioners into the tax bracket. The new state pension only needs to rise by 5% before anyone receiving the full amount will pay income tax on it, which could happen as soon as April 2026.

This unforeseen consequence of the tax freeze will be a nightmare for many pensioners. Four years ago, only 500,000 pensioners paid income tax on their state pension. Now, millions more could be affected, marking a radical change in the taxation landscape.

As Reeves prepares for her Spring Statement, the pressure is on to find a solution that balances the budget without disproportionately impacting pensioners and working people. The coming weeks will be crucial in determining the future of state pension taxation in the UK.

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