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 [...]
A freedom of information request by pension consultants LCP reveals that the number of pensioners paying higher income tax rates has doubled in the past five years. This surge is due to the income tax thresholds remaining frozen, causing more retirees to fall into higher tax bands. In the current tax year, over one million pensioners are paying 40% or 45% income tax, compared to just 494,000 in 2021/22.
The number of those paying the additional 45% tax has nearly tripled, reaching 115,000 from 39,000. The freeze on income tax thresholds, chosen by former Chancellor Rachel Reeves to extend until the end of the decade, has caused this significant increase. Despite the freeze, state pension increases through the triple lock policy have pushed more pensioners into higher tax brackets.
The triple lock increases the state pension annually based on average wage growth, inflation, or 2.5%, whichever is highest. The result is more pensioners finding themselves subject to 40% or higher income tax. Steve Webb, former pensions minister and partner at LCP, noted that many retirees may have anticipated being basic rate taxpayers in retirement, but not paying 40% or more of their pension income in tax.
The Treasury estimates that speeding up Reeves' decision to extend the income tax threshold freeze until the 2030/31 tax year will generate around £12 billion in additional revenue.
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