One million more pensioners set to pay income tax in 2031 – how to lower your bill

One million more pensioners will need to pay income tax in 2031, a new forecast suggests, due to successive freezes to tax thresholds.

The number of pensioners paying income tax will rise by 600,000 to 9.3 million in 2026/27, according to the Office for Budget Responsibility (OBR), from an expected 8.7 million in 2025/26.

In 2030/31, one million extra pensioners will be dragged into the taxman’s net, based on the fiscal watchdog’s latest forecasts for the UK economy published alongside the Spring Statement on 3 March.

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The jump comes as incomes rise, in part due to the state pension increasing under the triple lock, but tax thresholds remain frozen until 2031.

The OBR said many of the one million people who will be pulled into the tax net in 2031 will pay “very small additional amounts” to HMRC.

Meanwhile, the chancellor Rachel Reeves has said there will be a workaround for pensioners whose sole income comes from the state pension who are expected to pay income tax from 2027.

HM Treasury is expected to set out more detail on how this exemption will be administered later this year.

Why more pensioners are paying income tax

Pensioners have seen their state pension steadily rise under the triple lock mechanism since it came into effect in April 2011.

The mechanism sees the state pension increase by the highest figure out of 2.5%, inflation (CPI) or average earnings growth.

In April 2026, the state pension will rise by 4.8%. It means the full new state pension will increase from £230.25 a week now to £241.30 per week from April 2026.

However, the tax-free personal allowance (£12,570) and income tax thresholds have been frozen at their current levels since April 2021 and will remain there until 2031.

As people’s incomes increase, in part for pensioners because of a higher state pension, more of their money is liable for tax. The process is known as fiscal drag and has been described as a “stealth” tax as people slowly pay more tax as their incomes rise with inflation.

Around 8.3 million people of state pension age paid income tax in 2024/25, up from 5.9 million in 2011/12, according to the latest HMRC data.

How pensioners could reduce their tax bill

If you’re one of the millions of pensioners currently paying, or expected to pay, income tax on your income, there are ways to mitigate the blow.

Defer your state pension

One option is to defer your state pension. For every nine weeks you defer, your state pension is boosted by 1% when you come to actually claiming it. This is if you reached or will reach state pension age on or after 6 April 2026.

You have to defer for a minimum of nine weeks to get any top up.

Delaying taking your state pension can be useful for tax purposes if you are still working and claiming it were to take you over certain tax thresholds.

You could then claim it when you are no longer working and your taxable income is lower.

Just bear in mind that deferring your state pension can reduce the amount you receive from government benefits.

Make the most of ISAs

You could top up your taxable income with cash withdrawn tax-free from an ISA.

If you are still earning money and want to stash some away, it’s worth adding it into an ISA as well.

Money held within a taxable savings account is subject to the personal savings allowance (PSA) which sees you taxed on interest earned over certain thresholds. Basic-rate taxpayers can earn £1,000 in savings interest tax-free, while the allowance is £500 for higher rate taxpayers. Additional rate taxpayers don’t get a PSA.

Spread savings or investment income with a partner

You may be able to spread income from savings or investments between you and your partner to lower your overall tax bill. This is particularly helpful if one’s income is much higher than the other’s.

Adam Cole, retirement specialist at Quilter, said: “Couples can often reduce the overall bill by shifting savings or investment income towards the lower‑earning partner.”

One allowance you can utilise is the marriage allowance which lets you transfer £1,260 of your personal allowance to a higher-earning partner to reduce their tax bill.

To qualify, the lower earner must normally have income below the personal allowance and their spouse or civil partner must be a basic rate taxpayer.