New HMRC figures show pensioners paid around £8bn more in income tax last year as frozen personal allowances continued to drag retired people into higher tax bands. Tax paid by those in retirement climbed from £21.1bn to £29.8bn over two years, an increase of more than 40%.
Industry experts attribute the rise to fiscal drag, with thresholds and personal allowances remaining frozen while incomes increase.
Rising pensioner tax bills
Steve Webb, partner at LCP and former pensions minister, 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."
The number of higher-rate taxpayers reached 6.6m during the last financial year, according to HMRC data cited by City AM. That pushed the cost of income tax relief on pensions from £47.8bn in 2023/24 to £60.4bn in 2024/25.
Webb said the government might be inclined to cut tax relief to reduce the bill, but added that doing so is "very difficult halfway through a Parliament". He said: "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."
Auto-enrolment participation holds steady
Pension participation remained robust, with about 90% of eligible employees contributing to a workplace pension in 2025, representing 22.6m people and an increase of 0.6m on 2024, according to the Department for Work and Pensions.
Workers aged 22 to state pension age qualify for auto-enrolment once they earn £10,000 a year. That earnings trigger has been frozen since the 2014/15 tax year, despite both the general and minimum wage rising considerably.
Gaps persist for smaller employers
But the figures also reveal persistent participation gaps. Around 45% of eligible private-sector employees working for a micro employer with fewer than five staff do not contribute to a workplace pension. Self-employed workers do not automatically qualify for the scheme, and those earning below the threshold are failing to save sufficiently or not saving at all, leaving them vulnerable to poverty in retirement.
Opt-out rates rose to 12% last year. The department had initially attributed the lack of engagement to the pandemic and the cost-of-living crisis, but the reluctance to save has persisted.
Rebecca Williams, financial planning divisional lead at Rathbones, said: "It's notable that opt-out rates have edged higher. Cost-of-living pressures continue to squeeze household finances, making long-term saving harder for some people to prioritise. Meanwhile, lower participation among some groups and employees working for the smallest businesses shows there is still work to do to make retirement saving truly universal."
