Over one million pensioners hit by higher income tax rates
The number of pensioners paying the highest rates of income tax has doubled in the last five years as frozen thresholds drag more Brits into higher bands.
The amount of pensioners paying income tax at 40 per cent or 45 per cent has surpassed one million this current tax year, according to a freedom of information request submitted by pension consultants LCP.
In the 2021/22 tax year just 494,000 retirees found themselves paying at these rates.
The number paying the additional rate of 45 per cent has roughly trebled during this period, reaching 115,000 from 39,000 five years ago. Meanwhile, the number of people paying the basic rate has stayed relatively low, rising from 6,250 to just 8,480.
Frozen thresholds
The rise in higher rate tax payers comes after former chancellor Rachel Reeves chose to extend the freeze on current tax thresholds until the end of the decade in the 2025 Autumn Budget, despite previously branding it a “stealth tax”.
Income tax thresholds have traditionally risen in line with inflation to ensure workers given pay rises keep up with the rising cost of living.
The level at which people start paying the higher rate of income tax at 40 per cent has been frozen at £50,270 since 2021/22. Meanwhile, the starting point for additional rate taxpayers has been frozen at £125,140 since the 2023/24 tax year.
The result of the freezes, coupled with significant increases to the state pension off the back of the triple lock policy, has yanked more pensioners into higher bands.
The triple lock is designed to increase the state pension each April by either average wage growth, inflation or 2.5 per cent, depending on which is highest.
“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,” said Steve Webb, former pensions minister and partner at LCP.
Speeding up
Reeves’ decision to extend the income tax threshold freeze until the 2030/31 tax year is anticipated to accelerate this trend.
This is because the frozen tax band has drifted to a dense part of the pensioner population, meaning even a small increase will send a wave of Brits over the threshold at once.
The Treasury estimates this will raise roughly £12bn in extra revenue.
“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…for some that means more pension saving will be needed today to compensate,” Webb said.