Hundreds of thousands more pensioners look set to pay income tax than the government previously estimated, according to new HMRC figures.
Since freezing the thresholds in 2021, more people – especially pensioners – have been caught by the income tax net.
The tax allowance was set at £12,570 in 2021/22. Since then, three million more people over 65 are due to pay tax and for the first time, more than 10 million people in this age group will be liable.
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Why are more pensioners paying tax?
Steve Webb, partner at pension consultants LCP and the former pensions minister, said a combination of the freeze in personal tax-free allowances, combined with the significant year-on-year rises in the state pension (and other sources of taxable income), alongside a rise in the size of the pensioner population, means the number of tax-paying over-65s has risen dramatically.
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Department for Work and Pensions (DWP) figures suggest around 12.2 million people in the UK are receiving a state pension, meaning more than seven in 10 pensioners are now taxpayers, with an extra million expected by 2030-31.
The new state pension is currently £12,547 – just below the basic income rate threshold of £12,570. From April 2027, it is expected to rise to £12,578 – just above it, meaning state pensioners will have to pay income tax on these small amounts.
Every year the government releases income tax liabilities statistics, which show the total number of people paying tax. The data is split by factors such as age, region and marginal tax rate.
The Spring Statement suggested previously published figures might have underestimated the number of taxpaying pensioners but it was buried in the accompanying paperwork, whereas it has now been officially confirmed.
What are the government plans to help pensioners?
In the Autumn Budget, chancellor Rachel Reeves proposed a special scheme that would prevent such people paying tax, citing the administrative burden but as yet, no details have emerged.
Speaking to MoneyWeek, Webb said: “They need to get cracking because it needs to be clear by next April and it will probably need legislation. It’s all very well saying it doesn’t matter until the next of the financial year but that’s not really good enough – people want to know where they stand. So I think they’re up against it because any of the possible solutions so far look to be a bit of a mess.”
While no details have emerged, Webb said rumours are circulating.
“There’s talk they'll do something quite radical, like tax everybody’s state pension at source – taxing everybody at 20% and then people who are non-taxpayers will have to claim a refund.
“That doesn’t actually solve the problem but it means that they’re not collecting lots of silly small amounts of tax through a ‘process’. That’s the rumour, which I think would be absolutely awful as you’d then have several million non-taxpaying pensioners who would all be overtaxed and all have to jump through hoops to get back money that they don’t currently have to pay.”
A HM Treasury spokesperson said: “Anyone whose only income is the full new or basic state pension without any increments will not pay income tax and we are committed to that over this Parliament.
“By keeping the triple lock, 12 million pensioners will see their income rise by up to £470 this year, and they continue to benefit from the highest personal allowance in the G7.”
