An additional 420,000 pensioners will pay income tax this financial year, bringing the total to 8.7 million, as the combination of rising state pensions and a frozen personal allowance continues to widen the tax net.
Figures from HM Revenue & Customs reveal that retirees are increasingly falling victim to so-called “fiscal drag”, with income tax thresholds frozen since 2021 despite annual increases in the state pension. The personal allowance — the amount a person can earn before paying income tax — has remained at £12,570, while the full new state pension has risen sharply under the triple lock, from £9,332.20 to £11,973 in just four years.
David Brooks, head of policy at the consultancy Broadstone, said the scale of fiscal drag was now “undeniable”: “While the country’s demographic shift naturally increases the number of pensioners liable for income tax, fiscal drag is unequivocally pulling hundreds of thousands more into the income tax bracket each year.”
Although the triple lock was designed to shield pensioners from inflation and the rising cost of living, its effectiveness is increasingly turning into a double-edged sword. By April 2027, the Office for Budget Responsibility expects the full new state pension to exceed the personal allowance, rising to £12,885.50 — £315.50 above the threshold. Pensioners receiving the full amount would then owe 20% tax on the excess, effectively losing £63 annually.
For many, the state pension alone will now bring them close to or beyond the tax threshold — particularly those with additional sources of income, such as private pensions, rental income or dividends. Once that combined income exceeds £12,570, tax kicks in at the basic rate of 20%.
Record numbers now paying higher rates
The pensioner tax hike is part of a broader surge in tax receipts from individuals. More than seven million people are now expected to pay the higher rate of income tax at 40% this year, up from just over 5.1 million in 2022-23. The number of taxpayers in the 45% additional rate band has more than doubled in three years, rising to 1.23 million from 570,000.
Basic-rate taxpayers have also increased, from 28.8 million to 30.8 million, largely because of threshold freezes rather than pay increases alone.
Neela Chauhan, partner at accountancy firm UHY Hacker Young, warned the growing tax burden on higher earners risked economic consequences. “There are real concerns over the impacts of placing an ever higher tax burden on high earners. If pushed too far, it could drive talent overseas or deter skilled individuals from coming to the UK. There are already signs of a ‘brain drain’ developing.”
The Conservatives have pledged to counteract the fiscal drag on pensioners with a so-called “triple lock plus” — which would see the personal allowance for pensioners rise each year in line with the higher of inflation, average earnings or 2.5%, mirroring the triple lock applied to the state pension itself.
Labour has dismissed the proposal as lacking credibility, and it remains unclear whether the Treasury intends to amend the freeze in future budgets. For now, the government’s policy is to keep the income tax thresholds frozen until at least 2028.
The freeze has proven a lucrative strategy for the Treasury, delivering tens of billions in additional revenue without raising tax rates — and without triggering the political scrutiny usually associated with overt tax hikes.
But as more pensioners cross the tax threshold each year, pressure is growing for ministers to intervene or risk an electoral backlash from older voters, a traditionally reliable Conservative base.
The Treasury has been approached for comment.
