Number of pensioners paying income tax jumps 25% in four years

• 8.5m over 65s will be liable for income tax this year, up from 6.8m in 2020-21
• 5.6m will pay the high income tax rate, a 41% increase compared to 2020-21
• Some 15.6% of income tax payers will pay the higher 40% this year

An extra 800,000 pensioners will be paying income tax this year due to high inflation pushing state pension higher and frozen tax allowances.

HMRC figures show 8.5million people aged 65 or over will be liable for income tax this year – a 10 per cent increase from 7.7million in 2022-23 and a quarter more than 6.8million in 2020-21.

It means around two-thirds of over-65s on a state pension with only a small amount of extra income from a workplace pension or other nest egg will be caught in the tax trap. 

Steve Webb, former pensions minister and This is Money’s pensions agony uncle, said: ‘A combination of high inflation and frozen tax allowances means that well over eight million people aged 65 or over are now paying tax, a doubling in the last two decades.

‘The number of pensioners paying tax will continue to increase rapidly in years to come, particularly if inflation remains relatively high and thresholds continue to be frozen.’

The pensions ‘triple lock’ guarantees that the state pension rises each April in line with the highest of either the previous September’s inflation rate, earnings growth or a rate of 2.5 per cent. 

Meanwhile, some 5.6million people will end up paying the high income tax rate, a 41 per cent increase compared to 2020-21.

It means that 15.6 per cent of income tax payers will pay the higher 40 per cent rate this year, according to HMRC. 

There are also an extra 862,000 people who will pay additional rate income tax, an increase of 99 per cent compared to four years ago.

The total number of taxpayers of all ages is estimated to have increased by 1.3million annually to reach 35.9million in 2023/24. 

This follows the introduction of a four-year freeze on tax thresholds in 2021 by then Chancellor Rishi Sunak, who pegged the personal allowance – the point at which workers start paying income tax – at £12,570 from 2022 until 2026. 

Chancellor Jeremy Hunt then extended the freeze for another two years. 

The Resolution Foundation warned this week that the freeze will cost every UK household the equivalent of £4,200 in extra taxes by 2027-28. 

Anthony Whatling, partner at wealth management firm Evelyn Partners, said: ‘The higher rate band used to be thought of as the domain of quite well-off earners, but many of those now paying income tax at 40 per cent will not feel that way, particularly in the current financial climate.’ 

But while many more will become higher rate taxpayers, lower earners will suffer particularly as they will see more of their income taxed at 20 per cent, according to Interactive Investor.

Someone earning £20,000 in 2022/23 will pay £870 extra due to fiscal drag by 2028, equivalent to a 10p rise in income tax, according to the investing platform’s calculations.

Meanwhile, someone earning £50,000 in 2022/23 will pay £1,924 extra due to fiscal drag by 2028, equivalent to a 5p rise in income tax.

Alice Guy, head of pensions and savings at Interactive Investor, said: ‘The stark figures demonstrate the chilling effectiveness of freezing tax thresholds.

‘Freezing tax thresholds is the government’s preferred way of increasing the tax burden and tax thresholds are expected to remain frozen until 2028. 

‘This policy has a painful impact in times of high inflation, as more of us are dragged into paying higher-rate tax.’