Another 1.5million pensioners could be dragged into paying higher rates of income tax if Rachel Reeves extends a freeze on thresholds, experts have warned.
The Chancellor is said to be looking for tax rises and spending cuts worth £40billion at next week’s Budget.
As part of her revenue-raising efforts, it has emerged she is likely to extend a freeze on income tax thresholds for another two years to 2030.
Freezing tax thresholds have been dubbed a ‘stealth’ raid as they drag people into higher income tax brackets as their earnings rise.
A new analysis by Quilter, a wealth management company, found that 3.1million pensioners were already on track to be pulled into higher rates by 2027/28.
And they said extending the freeze for another two years could potentially drag 1million to 1.5million extra retirees into higher or additional rate tax brackets between 2023 and 2030.
The 40 per cent higher rate of income tax is paid on earnings above £50,271, while the 45 per cent additional rate is paid on earnings above £125,140.
Jon Greer, head of retirement policy at Quilter, said: ‘News that Rachel Reeves may potentially implement an extension of the tax threshold freeze will be yet another blow to pensioners.
‘The freeze is rapidly turning into a major tax burden for older Britons with estimates based on the data showing that the move could potentially drag 1 to 1.5 million extra pensioners into higher or additional rate tax brackets.
‘The triple lock may increase state pensions, but with tax thresholds frozen, many will find themselves paying taxes on what should be a lifeline during retirement.
‘For those with a combination of state and private pensions, the hit will be felt even sooner, eroding their incomes at a time when financial security is crucial.
‘Compounding this pressure, Reeves’ decision to axe the Winter Fuel Payment adds salt to the wound.’
In their general election manifesto, Labour promised not to increase National Insurance, VAT or income tax rates.
The Chancellor is expected to argue that freezing income tax thresholds for longer would not be a breach of her party’s manifesto because it is not a direct increase.
When the Tories announced a freeze on income tax thresholds in 2021, then chancellor Rishi Sunak defended the move as part of his bid to fix the public finances after the Covid crisis.
The Conservatives made the same pledge not to raise the rates of National Insurance, VAT or income tax in their 2019 election manifesto.