More than a million pensioners are now paying over 40 per cent in tax, new figures show, a figure that has doubled in just four years.
But experts have warned this could lead to pensioners facing a “triple whammy” of tax rises, with those who cross into higher tax brackets facing two additional financial hits to income tax – more tax on their savings income and higher capital gains tax (CGT).
The number of pensioners paying the higher tax rate (40 per cent) is 1,028,000 in the current tax year, according to data from HMRC, obtained by pension consultancy LCP through a Freedom of Information (FoI) request.
In 2021/22, just 494,000 pensioners were in the higher or additional tax (45 per cent) bands.
The sharp rise reflects a broader trend of millions more people being pulled into paying income tax at higher rates, due largely to the Government’s prolonged freeze on personal tax thresholds.
With inflation and wage growth pushing up incomes, more individuals, including large numbers of pensioners, are now crossing key tax thresholds and facing heavier tax burdens as a result.
Sir Steve Webb, former pensions minister and partner at LCP, said: “This has more than doubled from under half a million four years ago to over a million now.
“Not only does this mean more tax on things like income from state and company pensions, it also means these pensioners are paying more tax on their savings, as their personal savings allowance is cut, and a higher rate of capital gains tax – a ‘triple whammy’.”
The FoI data reveals the number of pensioners paying income tax at any rate has risen from 6.7 million in 2021/22 to 8.8 million in 2025/26 – an increase of nearly one third.
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Over the same period, the number of those paying tax at 40 per cent or more has more than doubled.
In 2021/22, 455,000 pensioners paid income tax at the higher (40 per cent) rate, and 39,000 at the additional (45 per cent) rate. By 2025/26, those figures are projected to rise to 904,000 and 124,000 respectively.
The proportion of taxpaying pensioners who fall into the higher or additional rate brackets has climbed from around one in 14 four years ago to around one in nine today.
This surge has been fuelled by a combination of factors, according to Sir Steve, including:
The freeze in the personal allowance and higher rate thresholds since 2021. Above-inflation increases in the state pension and inflation-linked private and workplace pensions. A cut in the threshold for additional rate tax from £150,000 to £125,140 in 2023/24.What is often overlooked, he said, is that becoming a higher rate taxpayer – even by just £1 – has costly knock-on effects.
Most taxpayers are entitled to a personal savings allowance (PSA), which allows some interest income to be earned tax-free.
Basic rate taxpayers get a £1,000 allowance. But once someone crosses into the 40 per cent tax bracket, that falls to £500 – and for additional rate taxpayers, it disappears altogether.
This means a pensioner with £1,000 of interest income who is just within the basic rate band pays no tax on that amount.
If they go just £1 over the higher-rate threshold, however, they must pay 40 per cent tax on £500 of that interest – a £200 bill triggered by just £1 of additional income.
Similarly, CGT rises sharply for those in the higher tax band. Basic rate taxpayers pay 18 per cent CGT on most gains.
Higher and additional rate taxpayers pay 24 per cent. Again, crossing the threshold by just a pound leads to a tax rate increase of a third on capital gains.
It comes amidst news that hundreds of thousands of pensioners have been hit with unexpected tax demands with HMRC issuing some 1.32million ‘simple assessments’ to pensioners in the 2023/24 tax year, up 74 per cent from the year before.
Such assessments are used by HMRC as a way to collect underpayments of tax from taxpayers with relatively straightforward tax affairs.
They save pensioners having to complete a self-assessment tax return but will be a surprise to those who do not believe their income exceeds the personal allowance of £12,570.
Looking ahead, the number of pensioners affected is expected to rise further.
The Government has committed to freezing income tax thresholds until April 2028. Although the increase in state pension age from 66 to 67 between 2026 and 2028 may slightly dampen growth in the affected population, more pensioners are still likely to be caught in the net.
Sir Steve warned that the combination of frozen thresholds and automatic pension increases is pushing more people into a tax trap.
He said: “The higher rate threshold has become a real cliff-edge over which growing numbers of pensioners are falling.”
HMRC has been contacted for comment.
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