Rachel Reeves’ Spring Statement – the impact of frozen income tax on the State Pension

Rumours are swirling ahead of the Spring Statement that chancellor Rachel Reeves will announce a further freeze to income tax thresholds.

In October’s Autumn Budget, Reeves confirmed income tax rates would remain frozen until 2028, pushing more and more people into higher tax brackets. But after 2028 it was expected to then increase in line with inflation.

However, it now looks like frozen thresholds could be extended for even further, meaning more people will pay more tax.

Not only will working people pay more tax, but it could even mean pensioners do too.

This article isn’t personal advice. Investments, any income from them, can rise and fall in value, so you could get back less than you invest. If you’re not sure what’s right for you, seek advice.

What could frozen income tax mean for pensioners?

The full new State Pension is due to rise to £11,973 per year from April – just a whisper underneath the £12,570 threshold for paying tax.

Even relatively small increases over the next couple of years will see this rise above this threshold and bring pensioners, who might be solely reliant on State Pension, into taxpaying territory.

It’s also an issue for pensioners on the basic State Pension.

Though the headline rate is lower, many pensioners will get top ups in the form of the state second pension, which could see them hovering around this threshold.

A freeze on thresholds also means those already paying tax in retirement are likely to be paying more over the coming years.

However, there are things you can do to reduce your bill.

Pension, ISA and tax rules can change, and any benefits will depend on your circumstances. You'll usually need to be 55 (rising to 57 from 2028) before you can access the money in your pension. Scottish tax rates are also different.

What can pensioners do to avoid paying more tax?

Putting money into a personal pension, like the Self-Invested Personal Pension (SIPP), will mean you get tax relief at your marginal rate. This means a £100 contribution from a higher-rate taxpayer in reality only costs them £60.

You can take up to 25% from your pension tax free and you might want to use this to supplement your income, so you don’t breach tax thresholds.

You can also make the most of ISAs, like a Cash ISA or Stocks and Shares ISA, within your retirement strategy to help lower your tax bill. Income from an ISA is tax free, so they can play a powerful role in helping you manage how much you pay.

Tax should form an important part of retirement planning with both pensions and ISAs having a role to play. Making the most of your allowances can serve you well both in the run up to and through retirement.

Article image by Ian Forsyth/Getty Images.