More than one million pensioners now trapped in higher tax brackets as threshold freeze bites
More than one million pensioners are now paying higher and additional rates of income tax, as the extended freeze on tax thresholds combines with rising state pensions to create what experts are calling a retirement tax trap.
Official figures show that 977,000 pensioners are liable for the 40 per cent higher rate of income tax in the current tax year, double the number from five years ago. Meanwhile, those paying the 45 per cent additional rate has trebled to 115,000 over the same period.
The figures, obtained by former Pensions Minister Steve Webb through a freedom of information request to HMRC, also reveal that 8.48 million pensioners are now paying the 20 per cent basic rate of income tax, up by a third since 2021.
The income tax personal allowance has remained frozen at £12,570 since April 2021, while the higher rate threshold has been locked at £50,270. The freeze, originally introduced by the Conservative government and extended by Labour to April 2031 in the Autumn Budget 2025, represents nearly a decade without any uprating of tax bands.
The additional rate threshold was not only frozen but actually reduced from £150,000 to £125,140 from the 2023-24 tax year onwards, helping to explain why the number of pensioners paying the top rate has tripled.
Rising incomes meet frozen thresholds
The collision between frozen tax thresholds and increasing pension incomes is driving unprecedented numbers of retirees into higher tax brackets. The state pension increased by 4.8 per cent in April 2026 to £241.30 per week, equivalent to £12,547.60 annually, under the triple lock mechanism.
The triple lock guarantees the state pension rises each year by whichever is highest: inflation, average wage growth, or 2.5 per cent. Since its introduction in 2011, the basic state pension has increased by over 81 per cent, significantly outpacing the approximately 65 per cent rise in consumer price inflation over the same period.
This dynamic has created what pension experts call fiscal drag, where more people are pulled into higher tax bands not because of real increases in prosperity, but simply because their incomes are rising while tax thresholds remain static.
Institute for Fiscal Studies data shows the dramatic acceleration of this trend. Around 6.7 million pensioners paid income tax in 2021-22, but this figure jumped to approximately 8.8 million by 2025-26.
Steve Webb, who served as the UK's longest-serving Pensions Minister from 2010 to 2015 and is now a partner at pension consultant LCP, said the figures represented a fundamental shift in retirement finances.
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 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.
Budget implications and future impact
The Office for Budget Responsibility estimates that the threshold freeze until 2030-31 will raise over £55 billion in revenue by 2030-31. The OBR forecasts that this policy will result in an additional 5.2 million individuals across all age groups paying income tax, with 4.8 million more people paying the higher rate by that date.
The policy has cross-party origins. The threshold freeze was originally introduced by the previous Conservative government between 2021 and 2023, with thresholds initially frozen for the period from April 2022 to April 2028. The current Labour government then extended the freeze to April 2031 in the Autumn Budget 2025, with the provision included in the Finance Act 2026.
Looking ahead, the state pension is projected to exceed the personal allowance threshold of £12,570 in April 2027 for the first time in history. However, the government has announced temporary relief measures so that pensioners whose sole income is the state pension will not be required to pay income tax until 2030.
Webb warned that current retirees and those approaching retirement would need to adjust their financial planning to account for the higher tax burden.
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 per cent or more, and for some that means more pension saving will be needed today to compensate.
The frozen thresholds mean that even modest increases in pension income, whether from the state pension or workplace pensions, can push retirees into higher tax brackets. For many, this represents a sharp departure from their expectations when they were saving for retirement decades earlier.
With the freeze now set to remain in place until 2031, pension experts are urging workers and retirees to review their retirement income projections and consider whether they need to save more to offset the impact of higher tax rates in their later years.
