HM Revenue and Customs (HMRC) has confirmed that well-off state pensioners are now facing a tax bill of £9,320 to maintain a comfortable lifestyle in retirement. This figure has doubled compared to five years ago, according to new analysis.
Sharp Rise in Tax Burden
The Department for Work and Pensions (DWP) revealed that pensioners are paying an extra £4,262 in tax to live comfortably compared with five years ago. A single pensioner now requires a post-tax income of £45,500 to enjoy a "comfortable" retirement, based on the latest calculations by Pensions UK, the trade body. This translates to a pre-tax income of £54,720, with £9,320 going to the Labour Government's tax arm in 2025-26. In 2020-21, a pensioner would have paid just £5,058 in tax for the same lifestyle.
Impact of Fiscal Drag
Charlene Young of AJ Bell, the investment platform, commented: "That leaves little wriggle room for income from pension savings, which will be subject to income tax after any tax-free cash has been taken. A decent retirement has got a lot more expensive, and the taxman is also set for a windfall thanks to fiscal drag. The big threshold squeeze is now set to last at least a decade, dragging millions into paying more tax than they would if tax allowances had kept pace with the cost of living."
Government Response
A Treasury spokesman said: "Anyone whose only income is the full new or basic state pension without any increments will not pay income tax and we are committed to that over this Parliament. By keeping the triple lock, 12 million pensioners will see their income rise by up to £470 this year, and they continue to benefit from the highest personal allowance in the G7."
Future Outlook
State pension payments will rise 4.8%, taking the full new state pension to £241.30 a week, or £12,547.60 a year – just over £20 below the £12,570 personal allowance. If current policies remain unchanged, the full new state pension is expected to exceed the personal allowance by April 2027, meaning pensioners living solely on the state pension could, for the first time, become liable to pay income tax. However, Chancellor Rachel Reeves has ruled out tax bills for state pensioners relying solely on the state pension.
