Pensioners are now paying approximately £30 billion a year in income tax, according to new figures from HM Revenue and Customs (HMRC). The amount has jumped from £21.1 billion in 2022/23 to £29.8 billion in 2024/25, largely due to frozen tax thresholds that are pulling more retirees into higher tax brackets.
Rising tax relief costs
The frozen thresholds have also increased the cost of income tax relief on pension contributions, which are tax-free up to certain limits. This cost rose from £47.8 billion in 2022/23 to £60.4 billion in 2024/25, as more people are pushed into the higher tax rate where relief is 40%, compared to 20% for basic-rate taxpayers.
Former pensions minister comments
Sir Steve Webb, former pensions minister and a partner at Lane Clark and Peacock, said: “The constant freezing of tax thresholds and allowances has dragged millions more people into paying higher rates of income tax. The flip side of this is that when they pay into a pension, they get more tax relief, leading the cost of tax relief to soar. But frozen personal allowances mean that the number of pensioners paying income tax has also risen steeply, and the tax bill on pensioners is up dramatically.”
Number of pensioner taxpayers rising
Separate HMRC figures from earlier this month show that the number of pensioners paying income tax has increased from 7.1 million in 2022/23 to 9.6 million in 2026/27. The tax-free personal allowance has been frozen at £12,570 since 2021/22, while the state pension has risen due to the triple lock policy.
Sir Steve added: “In all the discussion about fairness between generations, it is important to remember that pensioners are also paying growing amounts back to the Exchequer, paying around £30 billion in income tax on their pensions in the latest figures. Although the Government may be tempted to slash tax relief to reduce this rising cost, the politics become very difficult half way through a Parliament. Any change would be complex and technical and could take years to implement. It would deliver little money this side of the next election but would be hugely politically unpopular. The Government may well conclude that it simply has to live with the rising cost of tax relief for now.”
