Older people are getting dragged into paying more tax amid the freeze in thresholds.
More pensioners are being dragged into paying income tax (Image: Getty)
More than one million pensioners are now being hammered by the highest rates of income tax, with the number set to climb even further as frozen thresholds tighten the squeeze. The number of older people paying the 40% or 45% rates has more than doubled in just five years, soaring from 494,000 in 2021/22 to more than one million in 2026/27.
The surge follows the freezing of income tax thresholds in 2021, creating a stealth tax as rising pensions and other income drag more retirees into higher bands even though tax rates have not increased. And the squeeze extends far beyond the wealthiest pensioners.
Another 2.2 million have been pulled into paying basic-rate income tax, with the total rising from 6.2 million in 2021/22 to 8.4 million this year.
The figures, obtained through a Freedom of Information request by former pensions minister Sir Steve Webb, come amid warnings that millions more retirees could be caught in the tax net if thresholds remain frozen.
Meanwhile, an extra 2.2 million have been dragged into paying the basic rate of income tax over that period from 6.2 million in 2021/22 to 8.4 million in 2026/27.
Sir Steve, a partner at pension consultants 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% 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.
“Those who are planning their retirement finances will increasingly need to allow for the fact that a significant chunk of the income they had planned to live on will be taxed at 40% or more, and for some that means more pension saving will be needed today to compensate.”
The rise in pensioners paying more income tax is as a result of the threshold freezes combined with increases to the state pension under the triple lock – which sees payments rise each year by the highest out of inflation, earnings and 2.5%.
Since 2021, the income tax personal allowance has been frozen at £12,570, while the higher 40% rate is at £50,270 and the additional 45% rate is currently at £125,140.
And the freeze, which was started by the Tories and continued by Labour, is not due to lift until 2031.
The Silver Voice campaign group is calling for the personal allowance to be unfrozen at the Budget in October.
Director Dennis Reed said: “The number one priority for all pensioners in the Budget is for the personal allowance to be unfrozen.
“This iniquitous and sneaky tax grab is grinding down older people on very modest incomes.
“We are looking to Andy Burnham to deliver on the promises he made in Makerfield to review the lower tax threshold.”
The full new state pension is set to exceed the personal allowance from next April, with pensioners expected to get a boost of £500 under the triple lock.
Former chancellor Rachel Reeves confirmed last year that OAPs whose only income is the state pension would not have to pay income tax but no details have been set out yet on how this will work.
Prime Minister Andy Burnham raised hopes that he could unfreeze the personal allowance shortly after entering 10 Downing Street in July.
He said the issue was “lodged in my mind” after it was the thing he heard most on the doorstep while campaigning in the Makerfield by-election.
Mr Burnham later insisted there was no immediate commitment to increase the tax-free amount but that it would be looked at in the Budget.
The PM said: “Well, it’s funny these days you can’t answer a question honestly without then people reading everything else into it.”
He added: “I want to answer questions honestly in this job, as I said before.
“I think that’s all about trust in politics and doing politics differently, and I’m determined to keep working in that way.
“It was raised a lot, but I then went on to say, ‘But we’ll have to look at it at the Budget alongside everything else’. So no commitment, no unfunded promise.
“It’s just perhaps the way politics is these days and the way people report things, but that was an honest answer. There is no commitment at this point to change, but we will look at that at the Budget.”
It comes as there are also ongoing questions over the future of the triple lock after the next general election.
Mr Burnham has vowed to stick with Labour’s manifesto pledge to keep it in place for the duration of the current parliament.
A HM Treasury spokesperson said: “Pensioners whose only income is the full new or basic state pension without any increments will not pay income tax and we are committed to that over this Parliament.
“By keeping the triple lock, 12 million pensioners will see their income rise by up to £470 this year, and they continue to benefit from one of the most generous personal allowances in the G7.”
Comment by former pensions minister Sir Steve Webb
Paying the highest rates of income tax used to be something reserved for top earners or those running successful businesses.
But new figures, which I have obtained using the Freedom of Information Act, reveal that large numbers of pensioners are now also paying at least 40% of each extra pound on their pensions or other income.
In total, over a million pensioners are now paying the top rates of tax, double the numbers just five years ago. This means around one in nine of all pensioners who pay tax doing so at higher rates, compared with one in 14 at the start of the 2020s.
The biggest single reason for the change is the repeated freeze in tax thresholds, started by the last Government and continued by the present one.
With pensions rising in line with inflation (which went over 10% a few years back), but thresholds frozen, more and more pensioners find themselves dragged into higher tax bands, even though their spending power has not increased.
And the numbers are set to grow still further, with the previous Chancellor, Rachel Reeves, having announced that the freeze will go on to the end of this decade.
The policy of freezing tax thresholds, especially at a time of high inflation, is a stealth tax, pure and simple.
Governments might get away with a freeze for a year or two in the hope that no-one notices. But this long-term squeeze is reshaping the entire tax system, and pensioners, just as much as those of working age, are bearing the burden.