New FOI reveals over 1 million pensioners paying income tax at 40% or over – doubled in five years

Pensions & benefits Personal finance Pensions tax

A Freedom of Information request submitted by LCP Partner Steve Webb has revealed a surge in the number of pensioners paying income tax at the highest rates. This comes after a five-year period in which:

The income tax personal allowance has been frozen at £12,570
The starting rate of the higher rate of income tax has been frozen at £50,270The starting point for additional (45%) rate tax was first frozen at £150,000 and then cut to £125,140 from 2023/24 onwards

The result of these freezes, combined with significant inflation-linked increases to state pensions and other pensions, has been not only to bring more pensioners into the tax net, but to increase the numbers paying tax at 40% or 45%.

This is shown in the Table below from the FOI:

Taken together, those paying at 40% or 45% have risen from just under half a million (494,000) in 2021/22 to over a million (1,092,000) in 2026/27. The numbers paying the highest (45%) rate have roughly trebled over that period.

The continued freezing of allowances and thresholds, which has already been announced until 2030, will accelerate this trend. This is because the real value of the starting point for tax is starting to move into much denser parts of the pensioner income distribution.

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.

Steve Webb Partner at LCP

Notes to editors

The full FOI asks about those over state pension age (the data in this release) but also has figures for the numbers aged 65 or over, some of whom would be under state pension age.
HMRC publish regular figures on a) the number of pensioners paying income tax in total and b) the number of all taxpayers (of all ages) who pay tax at different rates, but do not routinely provide a split of tax rates just for pensioners. This FOI provides that split.
In this FOI, reference to ‘higher rate’ tax includes those in Scotland paying at 42% or 45% (the ‘higher’ and ‘advanced’ rates respectively) in the higher rate tax category, and those paying at 48% (the ‘top’ rate) in the ‘additional rate’ category.