More than one million pensioners now pay income tax above the 40% threshold
21 May 2025, 01:11
More than one million pensioners are paying income tax above the 40% threshold, new figures have revealed.
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According the numbers released by investment firm AJ Bell, Frozen tax thresholds and soaring inflation have led a record number of pensioners to edge into the 40 per cent tax bracket.
Charlene Young, senior pensions and savings expert at AJ Bell, said: “The nation has fallen victim to the effects of fiscal drag in recent years. Frozen allowances and tax thresholds have pulled more people into the tax system for the first time and hiked the rates of tax people pay as their income rises and they breach a new tax band.
"Pensioners are not shielded from it either – over one million people above state pension age will breach the higher rate 40% threshold this tax year, more than double the number there were when the big freeze began."
It comes as Chancellor Rachel Reeves confirmed she will not reduce the £20,000 annual Isa limit - a move that's set to benefit millions of UK savers.
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The notable U-turn follows calls from finance chiefs urging Reeves not to reform cash Isas, amid reports suggesting plans were afoot to slash the tax-free savings allowance.
The Treasury was reportedly considering slashing the annual cash Isa allowance from £20,000 to £4,000 - a move that aimed to encourage more people to put their money into investments.
"The government is in a straitjacket thanks to its own fiscal rules, and these figures will bolster the arguments of those calling for state pension reform," Charlene Young said.
"The full ‘new’ state pension is close to breaching the tax-free personal allowance, and many pensioners already receive well above this thanks to the way benefits could be built up under the old system.
“The Labour Party has repeatedly pledged to protect the triple-lock guarantee and has paused further hikes to the state pension age beyond those due to start in 2026.
"But with pensioner spending predicted to top 50% of the welfare bill by the end of the decade, and the rise in state pension age from 66 to 67 set to save £10 billion in borrowing, can it really continue to ignore calls for further reform?”
