Over 1 Million UK Retirees Face Higher Income Tax After Threshold Freeze

• The number of pensioners paying 40% tax or more has doubled in the last five years.
• Data reveals over one million retirees are now in higher or additional tax brackets.
• Frozen tax thresholds combined with rising pension incomes are driving 'fiscal drag'.
• Total tax-paying pensioners have reached approximately 9.6 million people.
• HMRC estimates around 140,000 retirees will receive new tax demand letters this year.

The number of UK pensioners paying income tax at a rate of 40% or higher has surpassed one million for the first time, effectively doubling over the last five years. New data obtained through a Freedom of Information (FOI) request from HM Revenue & Customs (HMRC) indicates that 977,000 retirees are now paying the 40% higher tax rate, while a further 115,000 are subject to the 45% additional rate.

This represents a significant increase from the 2021/22 tax year, when the total number of pensioners paying these higher rates stood at 494,000. According to reports in The Mirror, the total volume of pensioners paying any form of income tax has also risen sharply, climbing from 6.7 million to approximately 9.6 million in the same period.

The trend is largely attributed to a phenomenon known as 'fiscal drag'. This occurs when tax thresholds remain unchanged while incomes rise, often due to inflation or policy-driven increases. For many retirees, the state pension 'triple lock' policy—which ensures annual increases based on the highest of 2.5%, average wage growth, or inflation—has pushed their total income above frozen tax limits. The personal allowance has been held at £12,570 since 2021, and the threshold for the 40% higher rate of income tax has remained at £50,270 for several years.

Sir Steve Webb, a former pensions minister and partner at the consultancy LCP, who obtained the figures, warned that many individuals who expected to remain basic-rate taxpayers are now being hit by 40% tax bills. He noted that this shift requires retirees to save more of their income to maintain their planned standard of living. Chancellor Rachel Reeves has extended the freeze on these income tax thresholds until 2031. While the freeze was previously described as a 'stealth tax', the Office for Budget Responsibility (OBR) now estimates that the policy will cost UK taxpayers roughly £56 billion. HMRC has also reported that the total income tax paid by those above the state pension age reached nearly £30 billion in the 2024/25 tax year.

Furthermore, around 140,000 pensioners are expected to receive 'simple assessment' tax demand letters from HMRC for the first time this year. A specific '60% tax trap' is also affecting approximately 77,000 high-earning pensioners whose income falls between £100,000 and £125,140, caused by the tapering of the personal allowance.

Tom Church, Co-Founder of LatestDeals.co.uk, said, "With tax thresholds remaining frozen until 2031, it is more important than ever for retirees to review their total income and prepare for potential tax demands they may not have previously expected."