Labour is reportedly considering raising income tax for the first time in fifty years, a move that could see millions of pensioners facing higher tax bills. While workers would be shielded from the increase by a corresponding cut in National Insurance, pensioners – who do not pay NI – would see no such relief. According to early estimates, those on the additional rate of tax could face an increase of around £2,500 a year, while workers earning over £100,000 may also pay up to £1,000 more annually. The proposal, under consideration by Chancellor Rachel Reeves, is part of a broader effort to address the shortfall in public finances.
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The Chancellor has reportedly informed the Office for Budget Responsibility (OBR) that the income tax rise is being examined as one of the key fiscal measures ahead of the forthcoming Budget. The plan, if implemented, would contradict Labour’s election manifesto pledge not to raise VAT, National Insurance, or income tax. Ms Reeves has defended the proposal, arguing that those with the “broadest shoulders” should contribute more to stabilise the economy. The move follows a significant increase in borrowing costs and a downward revision of productivity forecasts by the OBR.
Pensioners appear to be among those most affected by the proposed changes. Around 8.8 million state pensioners could see their tax bills rise, with wealthier retirees facing the largest increases. This comes amid growing frustration among pensioners, who have reclaimed over £1.5 billion in overpaid pension tax in the past decade. Labour has also introduced other measures impacting retirees, such as bringing unspent pension savings within the scope of inheritance tax from April 2027, a move expected to affect estate planning for many older savers.
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The debate over pensioner taxation has been further inflamed by speculation that the Government may consider cutting tax-free pension lump sums, which currently allow retirees to withdraw 25 per cent of their pension pots tax-free. The Fabian Society, a Labour-aligned think tank, has urged the Chancellor to reduce this cap to £100,000, claiming that the current system is overly generous. Although the Treasury has declined to comment on tax speculation outside official fiscal announcements, the proposals have sparked significant concern among retirees and financial experts alike, who warn that further tax rises could disproportionately affect those living on fixed incomes.
