Frozen Tax Allowance Squeezes UK Pensioners' Income

Millions of workers and pensioners are experiencing a tax squeeze due to the freezing of the Personal Allowance at 12,570 pounds. This policy, originally introduced by Rishi Sunak during a covid-era budget, has been extended until 2031.

Analysis by AJ Bell suggests that if the allowance had kept pace with inflation, it would have reached 16,072 pounds for the 2026/27 tax year, creating a gap of 3,502 pounds in the tax-free threshold.

Retirees are particularly affected because the full new State Pension has risen to approximately 12,548 pounds per year. Since this amount nearly exhausts the Personal Allowance, almost all other taxable retirement income now triggers an Income Tax liability. Financial experts note that this tax drag partially offsets the benefits of the triple lock pension increase.

Des Cooney of Axis Financial Consultants warned that the freeze is no longer a distant concern. He advised individuals to plan their retirement based on net income rather than gross figures, as a portion of pension increases is effectively returned to the government through taxes.