Pensioners may have to budget extra £15,000 in retirement savings for 'stealth' tax

Those planning to retire in 2030 and beyond could be hit with a hefty £15,000 burden if the personal allowance tax freeze is extended, new data reveals. The increased cost of maintaining their current lifestyle is due to fiscal drag, a result of rising state pensions, escalating living costs and frozen personal allowances.

According to Pensions UK's latest Retirement Living Standards report, a single pensioner currently requires an annual income of around £43,900 for a comfortable retirement. However, this figure is expected to skyrocket to over £58,800 in just five years' time to maintain the same standard of living.

It's crucial to highlight that this £14,960 increase is projected by 2030 if the freeze on personal allowance and income tax thresholds continues.

Currently, the personal allowance permits most people to earn £12,570 each year before they're subject to income tax. However, this has been frozen until 2028, and Sir Keir Starmer hasn't dismissed the possibility of extending this freeze even further, according to the Telegraph.

During Prime Minister's Questions on Wednesday, the PM reassured that he intends to honour Labour's manifesto pledge not to hike taxes for working individuals. Yet, he sidestepped questions about whether the halt on income tax thresholds would continue beyond 2028.

Widely recognised by specialists as a 'stealth' tax, the freeze doesn't increase taxes. Instead, as incomes and benefits rise over time with inflation, it passively nudges people into higher income tax brackets.

This phenomenon, also known as fiscal drag, could even render the state pension taxable in the future. While the state pension isn't inherently exempt from income tax, it currently falls under the personal allowance threshold, thus escaping taxation.

With the triple lock guaranteeing a minimum annual increase of 2.5% and the current full new state pension amount at £11,973, it's possible that retirees would have to pay tax on their state pension income alone in the next few years if the freeze persists.

Alan Barral, financial planner at Quilter Cheviot, told the Telegraph: "Frozen income tax thresholds may feel like a technical detail, but they have real consequences for retirees whose standard of living is being squeezed.

"With the UK facing significant fiscal challenges, there's a real risk that Rachel Reeves may feel compelled to backtrack on Labour's pledge to unfreeze thresholds."

A government spokesman told the outlet: "We are committed to helping our pensioners live their lives with dignity and respect, which is why in April the basic and new state pension increased by 4.1pc.

"Pensioners will receive a boost of up to £470 to their income in 2025-26. Our commitment to the triple lock means millions will see their pension rise by up to £1,900 this parliament."