Rise in higher-rate pensioner taxpayers
The number of pensioners paying income tax at the higher or additional rates has surpassed one million in the current tax year, according to a Freedom of Information request submitted by pension consultants LCP.
Figures from the request show that 977,000 pensioners are currently paying the higher rate of 40 per cent, up from 455,000 in the 2021/22 tax year. A further 115,000 are paying the additional rate of 45 per cent, compared with 39,000 five years ago. This brings the total number of pensioners paying at least 40 per cent to more than one million, while in the 2021/22 tax year just 494,000 retirees were in these bands.
The number of pensioners paying the basic rate of income tax has also risen, according to the same data, though more modestly: around 8.5 million pensioners now pay the basic rate, compared with almost 6.3 million in 2021/22.
Frozen thresholds and the triple lock
The rise has been attributed to a combination of frozen tax thresholds and increases in the state pension linked to the triple lock. The level at which the higher rate of income tax becomes payable has been frozen at £50,270 since the 2021/22 tax year, and the threshold for the additional rate has been fixed at £125,140 since the 2023/24 tax year. Income tax thresholds have traditionally risen in line with inflation.
The personal allowance, the amount people can earn before paying income tax, was frozen at £12,570 in March 2021 by the previous Conservative government and is not currently set to increase until March 2031.
Under the triple lock, the state pension rises each April by the highest of average wage growth, inflation, or 2.5 per cent. City M. reports that the interaction of these increases with frozen thresholds has pulled more pensioners into higher tax bands.
Policy decisions and projections
In the 2025 Autumn Budget, former chancellor Rachel Reeves chose to extend the freeze on income tax thresholds until the end of the decade, a decision that City M. reports is anticipated to accelerate the trend of pensioners paying higher-rate tax. The Treasury estimates that the extended freeze will raise roughly £12bn in extra revenue.
The freeze on the personal allowance was originally introduced by the Conservative government in March 2021. The Daily Mirror reports that the state pension alone is set to exceed the frozen personal allowance next April when it increases in line with the triple lock. The government has promised that pensioners whose sole income is the state pension will not pay income tax when payments rise above the frozen allowance.
Pensioners urged to plan for higher tax bills
Steve Webb, former pensions minister and now a partner at LCP, said: “Many people of working age may have expected that they would be basic rate taxpayers in retirement, but few will have expected to find themselves paying 40 per cent or more out of their pensions in tax. But this is the norm now for over a million pensioners, with the number set to rise further.”
He added: “Those who are planning their retirement finances will increasingly need to allow for the fact that a significant chunk of the income they planned to live on will be taxed at 40 per cent or more, and for some that means more pension saving will be needed today to compensate.”