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 and the starting rate of higher rate income tax has been frozen at £50,270.
In addition, the 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%.
Taken together, those paying at 40% or 45% has 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.
Steve Webb, partner at LCP and former pensions minister, said: “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.”
