More than 420,000 more retirees will have to pay income tax this financial year amid the ongoing freeze to tax allowances.
The number of pensioners who are being taxed is rapidly increasing, with the total number of taxpayers over the state pension age expected to rise to 8.7 million – a two million increase since income tax bands were frozen in 2021.
Why are more pensioners paying tax?
Hundreds of thousands more pensioners are being pushed into paying tax because their taxable income, such as from a pension, will exceed the tax-free personal allowance – which has been frozen at £12,570 until 2028.
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The Conservative government froze tax bands in 2021, as a tax-raising measure known as fiscal drag.
The frozen tax bands do not keep up with inflation, meaning more is spent on tax as incomes rise.
Fiscal drag will hit more retirees as the state pension continues to rise each year.
In April 2025, the full new state pension increased by 4.1% to £11,973, meaning even retirees who have no other income apart from the state pension are teetering on the edge of being liable to pay income tax.
The full new state pension is expected to bust the personal allowance as soon as 2027 due to the ‘triple lock’ mechanism – where the payment rises in line with the highest out of inflation (CPI), average earnings growth, or a flat 2.5%.
David Brooks, head of policy at pensions consultancy Broadstone, said a rise in pensioners facing income tax liabilities is expected given the UK’s “demographic changes due to our ageing population”, but fiscal drag was the main driver.
“While perhaps personally frustrating for many pensioners, it reflects the nature of inflation linked occupational pensions and a triple-locked State Pension that continue to rise,” he added.
“The government will be called on again to protect pensioners from this impact but with seemingly few ways to control the rise in pensioner incomes, taxation is the only tool left.”
How does tax on your pension work?
The state pension and most pensions are taxable. This means that you are liable to pay tax on part of your pension, if your annual income exceeds the tax-free personal allowance of £12,570.
In the current tax year, you will not need to pay income tax if you only receive the state pension, with absolutely no other forms of income.
However, the vast majority of pensioners have something else that boosts their income such as a private or workplace pension, earnings from employment or self-employment, investment income, rental income, or savings.
Pensioners getting the full new state pension will only be able to get £597 in other income tax-free before being tipped into the 20% basic rate tax band.
How do you pay tax on your pension?
For most people, the majority of their taxable income on top of the state pension comes from a private pension.
In this case, paying income tax is relatively simple because your pension provider typically does it for you by taking off any tax you owe before they pay you.
If you are working at the same time as getting your pension, your employer will usually take any tax you owe off your earnings under the pay as you earn (PAYE) system.
However, if you are self-employed, you must fill in a self assessment tax return at the end of the tax year. On the tax return, you must declare your overall income, including the state pension and money from private pensions.
If you are earning extra income on top of your state pension in any other ways, such as rental yields, you will also have to report it in a self assessment tax return.
If you owe any tax on investment income, HMRC will send you a calculation telling you how much you owe and how to pay it.
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