More than one million state pensioners now pay the higher income tax charge to HMRC - twice as many as five years ago. Unbeknownst to some, state pensioners have always been liable to pay income tax and pay tax on their state pension payments, too.
Who is affected by the tax rise?
According to a Freedom of Information Act request submitted by Steve Webb of LCP pension consultants, the number of retirees now losing 40% or more of their taxable income to HMRC has shot up. The amount of income tax you pay depends on your income.
Those earning less than £12,570 per year pay nothing - and this includes all new state pensioners who have only got the state pension right now, as even new state pensioners with full entitlement can only get £12,547 per year. But those who earn over £12,570, including work, their state pension, savings interest, rental income and any other qualifying income, then lose 20% of every £1 earned above £12,570 to tax.
Those earning above £50,270 then lose 40% of every £1 earned above £50,270 as well. At the top of the ladder, those earning over £125,140 lose 45% of every £1 above that threshold.
Sharp rise in higher-rate pensioners
According to Mr Webb's FOI request, more than one million state pensioners are now paying either 40% or 45% tax on their earnings, a rise from 494,000 in the 2021-22 tax year to 1,092,000 in the 2026-27 tax year.
He said: “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% or more out of their pensions in tax.
“But this is the norm now for over a million pensioners, with the number set to rise further.
“Those who are planning their retirement finances will increasingly need to allow for the fact that a significant chunk of the income they had planned to live on will be taxed at 40% or more, and for some that means more pension saving will be needed today to compensate”.
Budget pressures
Earlier this year, a petition launched by an Express reader called for the tax-free Personal Allowance, frozen since 2021, to finally be increased, which in itself would also hand more money to state pensioners. However, pressures from global events have recently pushed up the cost of UK borrowing, making tax reliefs unlikely in new Chancellor John Healey's first Budget, set for October 28.
