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The number of UK pensioners paying the highest rates of income tax has doubled in the past five years due to a combination of years of frozen tax thresholds and inflation adjustments to pensions.
HM Revenue & Customs data shows the number of pensioners paying income tax at rates as high as 45 per cent will jump to more than 1mn this year, from 494,000 in the 2021-22 tax year, as revealed by a Freedom of Information request submitted by pension consultants LCP.
“Many people of working age may have expected that they would be basic-rate taxpayers in retirement, but few will have expected to find themselves paying 40 per cent or more out of their pensions in tax,” said Steve Webb, a partner at LCP and a former pensions minister.
For pensioners, this will mean saving more today to reach their target standard of living in after-tax terms at retirement.
The income tax personal allowance has been frozen at £12,570 for the past five years, while the starting rate of higher-rate income tax has been frozen at £50,270.
The result of these frozen thresholds, added Webb, combined with significant inflation-linked increases to state and other pensions, has pushed more pensioners into the tax net and increased the numbers paying tax at 40 per cent or 45 per cent.
The freeze in personal income tax thresholds, which began in 2022 and is set to run until at least 2031, will end up costing taxpayers around £56bn, according to the Office for Budget Responsibility.
Other thresholds, such as those for tax allowances on pension contributions, can bring added charges. The so-called tapered allowance threshold, which starts at £200,000, will catch half a million earners in the current tax year, which ends in April, according to data from HMRC. Should the thresholds remain unchanged, that figure would climb by 114,000 by 2032, according to an analysis for the FT by pension consultants Barnett Waddingham.
Economists at the OECD noted in a report earlier this year that tax rates on wages for a typical single worker rose faster in the UK last year than in any other OECD nation. The Paris-based think-tank also measured the difference between labour costs to the employer and the corresponding net take-home pay of the employee, known as the “tax wedge”, and found that this, too, rose higher in the UK than in the other nations.
“Higher-rate tax was once a badge of affluence. Today, thanks to fiscal drag and years of frozen tax thresholds, it is increasingly being paid by ordinary people,” said Harry Bell, director of financial planning at wealth manager Raymond James.
