Pensioners paying top tax rates double in five years

The number of retirees paying the highest rates of income tax has doubled over the past five years, with more than one million pensioners now liable for 40 per cent or 45 per cent tax this year. Data obtained through a freedom of information request by pension consultants LCP reveals a significant shift in the tax burden for the elderly, driven largely by the freezing of tax thresholds. In the 2021/22 tax year, only 494,000 retirees were paying at these elevated rates, but the figure has since surged past the one million mark.

The increase is particularly pronounced among those paying the additional rate of 45 per cent, where the number of taxpayers has roughly trebled from 39,000 to 115,000. Conversely, the number of pensioners paying the basic rate has remained relatively low, rising modestly from 6,250 to 8,480 over the same period. This trend follows the decision by former chancellor Rachel Reeves to extend the freeze on current tax thresholds until the end of the decade in the 2025 Autumn Budget. Although Reeves previously described the freeze as a stealth tax, the policy has resulted in a substantial increase in the number of individuals pushed into higher tax bands.

Traditionally, income tax thresholds have risen in line with inflation to protect workers from fiscal drag. However, the threshold for the 40 per cent higher rate has remained fixed at £50,270 since 2021/22, while the additional rate threshold has been frozen at £125,140 since 2023/24. The combination of these frozen bands and significant increases to the state pension under the triple lock policy has effectively pulled more pensioners into higher tax brackets. The triple lock ensures the state pension rises each April by the highest of average wage growth, inflation, or 2.5 per cent.

Steve Webb, former pensions minister and partner at LCP, noted that many working-age individuals expected to be basic rate taxpayers in retirement, but few anticipated paying 40 per cent or more on their pensions. The Treasury estimates that extending the threshold freeze until the 2030/31 tax year will raise approximately £12bn in extra revenue. Because the frozen tax band has drifted into a dense part of the pensioner population, even small increases in income could push many over the threshold at once. Webb advised that those planning their retirement finances must account for the likelihood that a significant portion of their income will be taxed at higher rates, potentially requiring increased pension savings today.