One million pensioners now paying tax at 40% or above

New figures from HMRC, obtained under the Freedom of Information Act by former pensions minister Steve Webb, show that the number of pensioners paying income tax at the higher (40%) or additional (45%) rate has doubled in just four years and has just passed the one million mark. 

As a knock-on effect, these pensioners will, as a result, also pay extra tax on their savings income and capital gains, even if they are only £1 above the higher rate threshold.

The data shows that the total number of pensioners paying income tax at all has risen by around 2 million in four years, from 6.7m in 2021/22 to 8.8m in 2025/26, an increase of nearly one third.

However, the total number of pensioners paying at 40% or above has doubled over this period in 2021/22 the figure was just under half a million (494,000) but this year it has gone through the one million mark (1,028,000).

The proportion of taxpaying pensioners who pay at 40% or more has risen from around 1 in 14 in 2021/22 to around 1 in 9 this year.

The main reasons for the increase are the continued freeze in the income tax personal allowance and higher rate threshold and significant above-inflation increases in the rate of the state pension, combined with other inflation-linked pension increases.

The number paying at the additional (45%) rate rose especially quickly between 2022/23 and 2023/24 because the starting point was lowered from £150,000 to £125,140.

What is not commonly noted is that being a higher rate taxpayer – even by just £1 – triggers higher rates of tax on other forms of income. The key areas are:

a) Savings income

Most taxpayers currently benefit from a ‘Personal Savings Allowance’ (PSA) which is an amount of annual income from taxable interest which is exempt from tax. For basic rate taxpayers the PSA is £1,000, but for higher rate taxpayers it falls immediately to £500, and for additional rate taxpayers it is zero.

In the case where someone has £1,000 per year of interest income and is just within the basic rate band, they pay zero income tax on that interest. But if they go £1 above the higher rate threshold they now only have a PSA of £500. This means the remaining £500 is subject to tax, and their income tax rate is 40%, so they now have to pay £200 in tax on interest – just for an increase of as little as £1 in their income.

b) Capital gains

The standard rate of Capital Gains Tax for individuals is currently 18% on most forms of gains. But this only applies to those who pay income tax at the basic rate. Higher rate income tax payers have to pay 24% CGT on all of their gains. Again, going over the higher rate threshold by just £1 could lead to a jump in tax due on other forms of income/capital gains. 

For future years, the number of pensioners paying higher rates of tax is set to increase further as personal allowances and tax thresholds are due to be frozen until the start of 2028/29. But the rate of increase is likely to be slower than in recent years because state pension age will be rising from 66 in April 2026 to 67 by April 2028.

Steve Webb, partner at pension consultants LCP said: “There has been a significant increase in the number of pensioners paying income tax at all rates, but the rise has been greatest in the numbers paying income tax at the higher rates. This has more than doubled from under half a million four years ago to over a million now. Not only does this mean more tax on things like income from state and company pensions, it also means these pensioners are paying more tax on their savings, as their personal savings allowance is cut, and a higher rate of Capital Gains Tax – a ‘triple whammy’. The higher rate threshold has become a real cliff-edge over which growing numbers of pensioners are falling."