Reeves is sweating over her upcoming Spring Statement on 26 March, correcting the errors she made in her disastrous autumn Budget.
Taxpayers aren’t going to like the results – especially pensioners.
Despite taxing and borrowing to the tune of £70billion, her figures don’t add up.
She’s run out of “fiscal headroom”, and must either hike taxes again or cut spending in March. Or most likely do both in a new austerity raid.
Reeves may be forced to break a pledge she made in her Budget, not to extend the freeze on income tax thresholds.
The Tories froze the personal allowance at today’s £12,570 in 2021, and later extended the freeze for six years to 2028.
With higher rate tax bands frozen too, a staggering 7.7million will pay higher taxes by the end of the freeze, handing over £45billion in total extra tax.
In October, Reeves ruled out extending the freeze beyond 2028, saying it would “hurt working people” by taking “more money out of their payslips”.
This month she might break that pledge.
Paul Johnson, director of the Institute for Fiscal Studies (IFS), warns Reeves may have no choice but to extend the tax freeze by two more years to 2030.
Johnson said this is “right at the top of the policy options being considered”.
As we reported on Saturday, that’s a huge blow for workers by adding more than £4,000 to their tax bills.
Freezing the personal allowance at £12,570 is a huge blow for pensioners too, as millions more will pay income tax on their state pension.
That will happen even if they have no other sources of income. It will mark a radical change.
From April, the new state pension rises to a maximum of £11,973 a year, thanks to the triple lock.
That’s just £597 below the personal allowance. Even a modest extra income from savings or a private pension could push pensioners into HMRC‘s clutches.
The new state pension only needs to rise by 5% before anyone who gets the full amount pays income tax on it.
That could happen as soon as April 2026, and almost certainly by 2027.
This is the unforeseen consequence of the tax freeze, and it will be a nightmare for many.
Four years ago, just 500,000 pensioners paid income tax on their state pension. That’s one in 20.
Nearly all were older pensioners on the basic state pension who got additional state pension such as Serps or S2P and top.
Last year, thanks to the freeze, the numbers more than doubled to 1.2million, or 13% of pensioners, Age UK research shows.
If Reeves extends the freeze to 2030, 3.6million pensioners will be taxed on their state pension, which adds up to roughly two in five.
That would see the DWP pay state pension with one hand, and HMRC demand some of it back. What a waste of effort.
Plus of course millions of pensioners will pay income tax on their company and private pensions, and other investments, in the usual way.
Especially if Reeves slashes the Cash ISA allowance as well.
Around 600,000 pensioners have already been dragged into paying basic rate tax when they previously didn’t, thanks to the threshold freeze.
Many are older and vulnerable, and the tax liability often comes as a shock.
Some will even have to submit self-assessment tax returns for the first time, which can be a nightmare. Especially in your late 70s or 80s.
We were heading in that direction under the Tories. If Reeves extends the freeze, almost nobody will escape.
