Key facts
- Over one million pensioners are now paying income tax at 40% or 45%.
- This number has doubled from 494,000 in the 2021/22 tax year.
- The number paying the additional 45% rate has trebled to 115,000.
- Income tax thresholds have been frozen, with the 40% rate starting at £50,270 and the 45% rate at £125,140.
- The freeze on tax thresholds has been extended until the 2030/31 tax year.
Over one million pensioners are now subject to higher income tax rates, a figure that has doubled in the last five years. This increase is attributed to frozen tax thresholds, which are preventing retirees from benefiting from inflation-linked pay rises and are instead pushing them into the 40% and 45% tax bands.
According to a freedom of information request by pension consultants LCP, the number of pensioners paying the higher rates of income tax has surged to over one million in the current tax year, up from just 494,000 in the 2021/22 tax year. The number paying the additional 45% rate has roughly trebled over the same period, reaching 115,000 from 39,000 five years ago.
This trend is exacerbated by the decision to extend the freeze on current tax thresholds until the end of the decade. These thresholds, which dictate the income level at which different tax rates apply, have traditionally risen with inflation. However, they have been frozen at £50,270 for the 40% rate since 2021/22 and at £125,140 for the 45% rate since 2023/24.
The combination of frozen thresholds and increases to the state pension, driven by the triple lock policy, has resulted in more pensioners being pulled into higher tax brackets. Steve Webb, former pensions minister and partner at LCP, noted that many individuals expected to be basic rate taxpayers in retirement but are now facing higher rates on their pensions.
The extension of the tax threshold freeze until the 2030/31 tax year is expected to accelerate this trend. The Treasury estimates that this policy will generate approximately £12 billion in additional revenue. Webb advised that those planning for retirement should account for a significant portion of their pension income being taxed at 40% and may need to increase their pension savings accordingly.