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Huge jump in the number of pensioners paying higher rates of tax

Paloma Kubiak
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Paloma Kubiak

The number of pensioners paying higher or additional rates of tax has leapt by 70% in the past decade.

There has been a surge in the number of pensioners paying tax overall – an increase of over two million in the last decade – while the proportion paying at the highest rates has also increased.

HMRC figures obtained by pension consultancy, Lane, Clark & Peacock, revealed that in 2012/13, there were 400,000 pensioners who paid the higher rate (40%) tax, while 25,000 paid the additional rate of tax (45%).

However, in 2022/23, these figures have soared to 671,000 at the higher rate, while more than double the number (56,000) now pay the additional rate.

This is a 71% increase across the tiers, according to Steve Webb, partner at LCP and former pensions minister.

The table below shows a breakdown of the numbers…

HMRC figures for 2022/23 revealed there were 7.7 million taxpayers aged 65+, with one in 10 of all taxpaying pensioners paying a rate of 40% or more.

This is up from the 5.38 million recorded in 2012/13 where around one in 12 was paying the top rates of tax.

Webb explained the Budget of 2012 has fuelled the rise as it was confirmed that the government would gradually abolish the extra personal tax allowances ‘age allowances’ which pensioners used to enjoy.

In 2012/13, the income tax personal allowance for people aged 65-74 was £10,500 compared with a standard personal allowance for the under 65s of £8,105.  Pensioner allowances were frozen for several years until working age allowances had ‘caught up’ in 2015/16.

Tax-paying pensioners likely to increase

Webb said the number of pensioners paying tax at all or a higher rate of tax in the years to come are likely to increase further, due to three reasons:

  • The long-term freeze in the value of income tax personal allowances and income tax thresholds
  • The Autumn Statement 2022 decision to cut the starting point for 45% income tax to £125,140
  • The big increase in pensions linked to inflation (pensions triple lock), with state pensions rising by 10.1% in April 2023 and many occupational pensions also enjoying substantial inflation-linked increases.

‘Thresholds fail to keep pace with inflation’

Webb said: “The majority of people in retirement can now expect to have tax deducted from their pensions. This proportion is set to increase as tax thresholds fail to keep pace with inflation-linked pension increases in the coming years.

“In addition, the highest rates of tax are now biting more heavily on pensioners, with nearly one in ten pensioner taxpayers paying income tax at 40% or above. Anyone planning for their retirement needs to allow for the fact that income tax is likely to take a chunk out of anything they have put by.”