One million pensioners are now higher rate taxpayers and it's not just income tax to worry about

Frozen tax thresholds and above-inflation increases in the state pension have pushed one million pensioners into the higher rate tax thresholds for the first time.

HMRC data obtained by pensions consultancy LCP under the freedom of information act shows that the number of pensioners paying income tax at the higher 40% or 45% additional rate has doubled in just four years and just passed the one million mark.

It come as state pension payments have increased above the rate of inflation due to the controversial triple lock.

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But isn’t just the higher rate of income tax that pensioners need to worry about.

The higher earnings could also have an impact on their savings and investments.

How many pensioners are paying the higher rate of income tax?

The full new state pension as of April 2025 is £11,973 and there have been big increases in recent years due to the triple lock calculations.

This has been compounded by frozen tax thresholds, creating fiscal drag.

The current annual state pension payments already takes pensioners close to the personal tax allowance threshold of £12,570 and means pensioners with other income such as annuities or a buy-to-let portfolio are quickly being pushed into higher tax brackets.

The LCP research shows the total number of pensioners paying income tax at all has risen by around 2 million in four years, from 6.7m in 2021/22 to 8.8m in 2025/26 - an increase of almost one third;

However, the total number of pensioners paying at 40% or above has doubled over this period.

The HMRC data shows that in 2021/22 the figure was just under half a million at 494,000 but this year it has gone through the one million mark at 1,028,000.

The proportion of taxpaying pensioners who pay at 40% or more has risen from around 1 in 14 in 2021/22 to around 1 in 9 this year, LCP said.

This could get even higher if state pension payments continue to increase, especially with tax thresholds remaining frozen until 2028.

Steve Webb, partner at LCP, said: “There has been a significant increase in the number of pensioners paying income tax at all rates, but the rise has been greatest in the numbers paying income tax at the higher rates. This has more than doubled from under half a million four years ago to over a million now.”

The impact of being a higher rate pensioner

Moving into a higher rate tax band will mean pensioners pay more tax to HMRC, hitting their retirement income.

But there are other consequences.

Webb highlights that pensioners could end up paying more tax on their savings.

This is because the personal savings allowance (PSA) drops from £1,000 to £500 even if you go £1 into the higher rate threshold.

Webb said: “In the case where someone has £1,000 per year of interest income and is just within the basic rate band, they pay zero income tax on that interest. But if they go £1 above the higher rate threshold they now only have a PSA of £500.

“This means the remaining £500 is subject to tax, and their income tax rate is 40%, so they now have to pay £200 in tax on interest – just for an increase of as little as £1 in their income.”

Being a higher rate taxpayer will also have an impact on pensioners if they are selling assets such as shares to fund their retirement.

The standard rate of capital gains tax (CGT) for individuals is currently 18% on most forms of gains. But this only applies to those who pay income tax at the basic rate. Higher rate income tax payers have to pay 24% CGT on all of their gains, even if they are just £1 over the earnings threshold.

Webb added: “Not only are pensioners paying higher income tax, they are paying more tax on their savings, as their personal savings allowance is cut, and a higher rate of CGT – a ‘triple whammy’. The higher rate threshold has become a real cliff-edge over which growing numbers of pensioners are falling.”

How to reduce your tax bill

You can try to reduce your tax bill by being clever about how you access your income. For example, you could manage how much money you take from your pension through drawdown withdrawals to ensure you don’t go above different earnings thresholds.

This has become more significant ahead of changes to inheritance tax (IHT) rules in 2027 that will include pensions as part of someone’s estate.

Gary Smith, financial planning partner at Evelyn Partners said: “We would always advise clients to consider the income tax they will pay when planning pension withdrawals, but this question is becoming more important now that more savers are looking to take greater amounts out in light of the IHT measures.”

You could also make use of your spouse’s allowances when purchasing assets if they are a lower earner or start building up savings and investments in an ISA which can be protected from the taxman.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “If you’re married or in a civil partnership, you can share assets between you and double the amount of money you can make before the taxman takes a slice. For example, you can share income-producing assets with your spouse, so you can both take advantage of your personal allowance, dividend allowance and ISA allowance.”