More than ten million UK pensioners are now paying income tax, marking a new record as personal tax allowances remain frozen. The threshold for income tax, set at £12,570, has not changed since the 2021/22 tax year and is increasingly capturing more individuals.
According to Steve Webb, a former Pensions Minister and partner at consultant LCP, over seven in 10 pensioners are now taxpayers. Official figures from HMRC indicate that the number of individuals over 65 paying tax has increased by over three million since the freeze began. With approximately 12.2 million people receiving a state pension, pensioners now constitute about one-quarter of all taxpayers.
The freeze on tax thresholds is projected to continue until 2031 and is expected to impact millions more. Forecasts suggest that 40.8 million people will pay income tax in 2026/27, an increase from 36.7 million three years prior. This has also led to a significant rise in higher and additional rate taxpayers, with numbers increasing by 33.8% and 44.4% respectively over the same period.
Experts attribute this trend to a combination of factors, including the frozen tax-free allowance, annual increases in state pension and other taxable income, and growth in the pensioner population. From April, the standard rate of the new state pension, approximately £12,550 annually, will exceed the tax-free threshold for the first time.
While the government has indicated plans to exempt individuals whose sole income is the state pension from paying income tax, details on implementation remain scarce. Some experts have described these proposals as potentially flawed and not applicable to the majority of pensioners.
David Brooks, head of policy at Broadstone, noted that rising state pension values inevitably lead to more pensioners paying income tax. He suggested that taxation can be an efficient way for the government to differentiate between retirement incomes while maintaining the universality of the state pension. Brooks also emphasized that pensioners are a diverse group, with many having occupational and private pension savings, and that the focus should be on reducing poverty and targeting support to those most in need.
Jason Hollands, managing director at Evelyn Partners, highlighted that frozen thresholds are a significant driver of tax revenue. He pointed out that the number of people paying income tax has risen by over 18% since 2022/23, with higher-rate taxpayers increasing by 51% and additional-rate taxpayers more than doubling.
Hollands noted that frozen thresholds are particularly effective in generating revenue during periods of high inflation. He added that many individuals may be surprised to find themselves in higher tax brackets without a corresponding increase in real income.
Individuals can take steps to mitigate increased tax liabilities, such as increasing pension contributions to reduce taxable income or utilizing tax-efficient savings vehicles like ISAs. Spouses can also transfer assets to the lower-earning partner to reduce the overall family tax bill.
Laura Suter, director of personal finance at AJ Bell, observed that the government is a primary beneficiary of this situation, collecting significantly more tax revenue. She projected that the nation would pay £347 billion in tax in the current year, a substantial increase compared to when tax thresholds were last adjusted. Suter suggested that this revenue stream presents a fiscal challenge for policymakers, as it is a lucrative source of income that the government may be reluctant to forgo.