According to analysis by Ocean Finance, nearly half of new taxpayers by 2027 will be pensioners. It found that nearly 18 million more people are expected to be paying income tax by 2027, and almost half of them will be over 60.
With the state pension rising each year but the personal allowance stuck at £12,570, more older people are being dragged into the tax system.
Fiona Peake, personal finance expert at Ocean Finance, said: “The full new state pension now pays £221.20 a week, or around £11,500 a year, just a few hundred pounds shy of the personal allowance. Add even a modest private or workplace pension, and suddenly you’ve got a tax bill.
“The frustrating thing is, this is happening quietly. It’s not a tax rise on paper, but it feels like one in practice. Many older people will just receive a letter or notice a tax code change, with no idea why they’re suddenly being taxed on their pension income. It’s especially tough for those on a fixed income who are already watching every penny. And with inflation expected to rise again this year, it’s yet another blow to pensioners’ pockets.”
Six ways pensioners can cut their income tax bill
- Take pension withdrawals carefully
If you’ve got a defined contribution pension, think about how you take money out. Spreading withdrawals across tax years, instead of taking a large lump sum, can help keep your income below the threshold.
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- Check if you qualify for Marriage Allowance
Married couples or civil partners could save over £250 per year if one earns less than the personal allowance. If one of you isn’t using all your tax-free allowance, transfer some of it.
- Max out your ISA allowance
ISAs protect your savings from tax, including interest and dividends. With savings rates still decent and inflation coming down, it’s a good time to build up your ISA pot. The more you shelter in an ISA (up to £20,000 per year), the less likely you are to tip into paying tax unnecessarily.
- Delay your state pension
If you can afford to, deferring your state pension could pay off. For every year you delay, it goes up by nearly 5.8%, and that higher amount is paid for life. It’s a personal decision, but if your other income is low in the meantime, it could be a smart way to increase your future pension without triggering tax straight away.
- Double-check your tax code
HMRC doesn’t always get tax codes right, especially if you’ve got more than one income. A wrong code could mean you’re paying too much. It’s a good idea to check your code every year, especially after changes like retiring or starting to take a private pension.
- Boost your pension contributions
For those still earning, adding more into your pension can be a clever move. You’ll reduce your taxable income, get tax relief on your contributions, and boost your retirement pot at the same time.
