Millions of workers and pensioners are already paying hundreds of pounds more tax than they would have if the Personal Allowance had continued to rise with inflation, according to new research.
In Rishi Sunak's covid budget, the personal allowance hit £12,750 from April 2021 and was frozen for at least five years - which was then extended to 2031.
Analysis by AJ Bell estimates that if it had kept pace with inflation, the Personal Allowance would now stand at £16,072 for the 2026/27 tax year – £3,502 higher than it is today.
By 2029/30, it would have reached £17,380, almost £4,800 above the current threshold.
The £3,500 tax-free allowance that's disappeared
The frozen threshold has become an increasing concern because the full new State Pension has risen to around £12,548 a year, leaving very little room before other retirement income becomes taxable.
Des Cooney, from Axis Financial Consultants, says: "The full new State Pension has risen to £241.30 a week this year, which works out at roughly £12,548 over 52 weeks. Against a Personal Allowance of £12,570, that leaves virtually no headroom before other taxable retirement income starts creating an Income Tax liability."
He added: "With the Personal Allowance now set to remain frozen until 2031, that squeeze is no longer a distant concern. It is something people approaching retirement need to factor into their planning today."
For many people, even a modest workplace or private pension could push them over the tax-free threshold.
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Cooney said: "People may see their State Pension increasing each year under the triple lock and assume that the whole increase improves their spending power.
"In reality, as more of their total income becomes taxable, part of that increase can effectively be handed back through Income Tax."
Looking ahead, he urged people to think beyond the headline State Pension figure.
"People should increasingly think about their retirement income on a net basis, rather than simply focusing on the gross pension figure they expect to receive."
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