There are now over a million pensioners paying income tax at 40 per cent or more, according to a freedom of information request submitted by consultancy Lane Clark & Peacock.
In five years, the number of pensioners paying the higher rate (40 per cent) has doubled, and the number specifically paying 45 per cent has trebled.
In this time period, the income tax personal allowance has been frozen at £12,570. The starting rate of higher rate income tax has been frozen at £50,270. The starting point for additional (45 per cent) rate tax was first frozen at £150,000 and then cut to £125,140 from the 2023/24 tax year onwards.
The continued freezing of allowances and thresholds which has already been announced until 2030 will likely accelerate this trend of more retirees paying into the maximum tax bracket.
Steve Webb, former pensions minister and now a partner at LCP, says: “Many people may have expected that they would be basic rate taxpayers in retirement, but few will have expected to find themselves paying 40 per cent 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 this rate, and for some that means more pension saving will be needed today to compensate.”
Rents are also expected to more than double over the next 20 years, taking the total cost of renting in retirement to around £419,000, according to research by Standard Life.
