More than a million pensioners are now subject to the highest rates of income tax, according to recent official figures.
Over the past five years, the number of pensioners liable for the 40 percent higher rate tax has doubled to 977,000. Concurrently, those paying the 45 percent additional rate has tripled to 115,000 in the current tax year. The number of pensioners paying the basic 20 percent rate has also risen by a third to 8.48 million during the same period.
These figures, revealed through a freedom of information request by former Pensions Minister Steve Webb, are attributed to a freeze on tax thresholds that commenced five years ago and is scheduled to remain in place until 2031. This freeze is expected to accelerate the trend of more pensioners entering higher tax brackets.
Webb, now a partner at pension consultant LCP, noted that significant inflation-linked increases to state pensions and other retirement incomes over the past five years have also contributed. He pointed out that the income tax personal allowance has been frozen at £12,570, and the threshold for the higher rate of income tax has remained static at £50,270. The threshold for the additional 45 percent tax rate was initially frozen at £150,000 before being reduced to £125,140 from the 2023-24 tax year.
Altogether, over ten million pensioners are currently paying income tax, a record high since the thresholds were frozen. "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 percent or more out of their pensions in tax," Webb stated. He added that this situation is now the norm for over a million pensioners, with numbers projected to increase further. Those planning their retirement finances are advised to account for a substantial portion of their income being taxed at 40 percent or more, which may necessitate increased pension saving.
Industry benchmarks suggest a single person requires an income of £32,700 annually for a decent retirement, with a couple needing £45,400. These figures cover essentials along with some discretionary spending on food, entertainment, and travel. For a more affluent retirement, including more frequent holidays and dining out, a single person might aim for £45,400 and a couple £62,700. A more frugal retirement, covering essential bills and limited extras, requires an estimated £13,900 for a single person and £22,500 for a couple, assuming full state pension eligibility. These estimates do not factor in income tax, housing costs, or potential future care expenses. Financial advice platforms warn that individuals in their 30s and 40s must account for inflation and higher future costs when forecasting retirement income needs.