How extending stealth tax freeze would cancel out pensioners’ Winter Fuel Payment by 2030

Pensioners getting by solely on the state pension face paying the equivalent of the Winter Fuel Payment in income tax by 2030, if thresholds remain frozen until the end of the decade, new figures show.

Retirees getting just the full new state pension could have to pay £200 in income tax by 2029/30, according to analysis by wealth management firm Quilter, if the state pension continues rising but tax thresholds remain unchanged.

The Conservatives froze income tax thresholds until 2028 while in government, and there is now speculation Labour chancellor Rachel Reeves could extend the freeze to 2030.

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The state pension is set to rise by 4.8% from April 2026, meaning the full new amount will be worth £12,547 a year.

Pensioners could receive a further 3% boost in the 2027/28 year in line with the Bank of England’s projection for 2026 inflation.

Should the state pension rise by 2.5% in 2028/29 and 2029/30 under the triple lock, the full new state pension amount will be worth £13,623 by 2029/30, Quilter estimated.

If the tax-free personal allowance, currently £12,570, is left frozen until 2030, it would mean someone on the full new state pension would need to pay £200.17 in income tax by 2029/30 – equivalent to the typical Winter Fuel Payment.

As the Winter Fuel Payment is withdrawn for pensioners with yearly incomes over £35,000, those with additional income (around £22,000 a year) and a full new state pension could also end up no longer eligible by 2029/30, unless the government increases the £35,000 threshold, Quilter warned.

Adam Cole, retirement specialist at Quilter, said: “In just a few short years, those with incomes comprised of solely the state pension will not only be paying tax, but they will do so at levels that would erase the Government’s Winter Fuel Payment, which is designed to help those who are most vulnerable.

“Failing to increase the Winter Fuel Payment threshold would also create a variation on the fiscal drag theme, resulting in many losing the benefit entirely.”

Source: Quilter

Fiscal drag leaves pensioners facing ‘retirement tax’

Income tax thresholds are currently frozen until 2028, and have been since 2021.

However, rumours are swirling that chancellor Rachel Reeves could announce an extension on the freeze to 2030 to drum up more cash for the Treasury.

The Institute for Fiscal Studies (IFS), a leading UK think tank, has said extending the freeze from 2028 to 2030, when combined with a frozen top rate of National Insurance contributions (NICs) since 2021, would raise an extra £8.3 billion.

However, freezing income tax thresholds is seen as a “stealth” tax, as people aren’t directly taxed more but pay extra as their wages and incomes rise in line with inflation – a phenomenon known as fiscal drag.

Fiscal drag doesn’t just affect pensioners, but anyone affected by income tax thresholds.

Hundreds of thousands more taxpayers are set to be pulled into the 60% tax trap by 2028/29 due to fiscal drag, recent research FOI figures obtained by Rathbones revealed.

What is the Winter Fuel Payment and who is eligible?

The Winter Fuel Payment is a once-yearly payment made to pensioners with incomes of £35,000 or less. It is worth up to £300.

The payment is designed to cover the extra cost of heating over the colder winter months and is usually made automatically in November or December.

The exact amount you’ll get depends on your circumstances and could range between £100 and £300. However, 62% of all Winter Fuel Payment recipients last winter were paid £200.

For example, those living alone born between 22 September 1945 and 21 September 1959 are eligible for £200.

The amount you receive varies depending on whether you get any benefits like Universal Credit or Pension Credit. The full eligibility criteria is available on gov.uk.

If your income is over £35,000 a year, you will receive the Winter Fuel Payment and then HMRC will reclaim it. The deadline to opt out of this year’s payment has passed.