Key facts
- Pensioners paid an additional £8 billion in taxes due to frozen personal allowances.
- Total tax paid by retirees rose from £21.1bn to £29.8bn in two years.
- The increase is attributed to fiscal drag, where frozen thresholds pull individuals into higher tax bands.
- The cost of income tax relief on pensions increased to £60.4bn in 2024/25.
- The auto-enrolment earnings threshold has remained frozen at £10,000 since the 2014/15 tax year.
Pensioners in the UK have seen a significant increase in their tax bills, amounting to approximately £8 billion in extra payments last year. This rise is primarily attributed to the government's policy of freezing personal allowances and tax thresholds, a phenomenon known as fiscal drag. As these allowances remain static while incomes and wages increase, more individuals, including pensioners, are being pulled into higher income tax bands.
According to figures from HMRC, the total tax paid by individuals in retirement climbed from £21.1 billion to £29.8 billion over a two-year period, representing a more than 40% increase. This trend has also driven up the cost of income tax relief on pensions, which jumped from £47.8 billion in the 2023/24 tax year to £60.4 billion in 2024/25. The number of higher rate taxpayers has also grown to 6.6 million.
Steve Webb, a partner at LCP and former pensions minister, highlighted that while increased pension contributions may lead to more tax relief, the frozen personal allowances are significantly impacting pensioners' tax liabilities. He suggested that any government move to reduce tax relief would be politically difficult and complex to implement, especially mid-parliament.
Meanwhile, pension participation in the UK remains high, largely due to the frozen earnings threshold for auto-enrolment, which has been set at £10,000 since the 2014/15 tax year. In 2025, around 90% of eligible employees, representing 22.6 million people, opted to save into a workplace pension. However, participation gaps persist, particularly among employees of micro employers and the self-employed. Opt-out rates have also seen a slight increase to 12%, with cost-of-living pressures cited as a reason for difficulty in prioritizing long-term saving.