Over a million pensioners paying higher rates of income tax

The number of pensioners paying income tax at 40 per cent or above has doubled over the past five years to more than one million, a freedom of information (FOI) request from LCP has revealed.

Furthermore, the number of pensioners paying the additional 45 per cent rate has trebled over the same timeframe.

Taken together, those paying at the higher-rate or additional rate has risen from just under 494,000 in 2021/22 to over one million (1,092,000) in 2026/27.

The figures were obtained through an FOI request, submitted by LCP partner, Steve Webb, as HMRC does not routinely publish data on the number of pensioners paying higher-rate and additional-rate income tax.

The FOI found that frozen income tax thresholds, combined with rising state and private pension incomes, had led to the increase in the number of pensioners paying higher-rate and additional-rate income tax.

LCP said that keeping tax thresholds frozen until 2030 was expected to accelerate this trend, as rising pension incomes push more retirees into tax bands that have remained unchanged.

The consultancy pointed out that higher taxes on pension income could leave more people falling short of their target retirement income unless they save more while working.

Steve Webb, LCP partner, Steve Webb, commented: “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 per cent 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 per cent or more, and for some that means more pension saving will be needed today to compensate.”

This article originally appeared in our sister publication Pensions Age.

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