Eight million state pensioners are facing a grim letter from HMRC as a rule introduced in 2021 continues to push them into higher tax brackets. New HMRC data shows that 8.2 million people of state pension age are now paying income tax, with their bills set to rise further.
Frozen Thresholds Cause Fiscal Drag
Income tax thresholds have been frozen since 2021 and will remain so until 2031. This policy is causing fiscal drag, where taxpayers are pushed into higher tax bands and face increased bills even without receiving a pay rise. David Little, partner in financial planning at wealth management firm Evelyn Partners, explained: “This data reveals how the powerful tide of fiscal drag is increasing the UK tax burden by sweeping millions into higher tax brackets, and into paying tax for the first time.”
Sarah Coles, head of personal finance at AJ Bell, added: “Almost 8 million people relying on their pension for their main source of income are handing over £24 billion in tax every year – nearly half a million of whom are paying higher-rate tax. Frozen tax thresholds mean this is only going to get worse for everyone. Even if your pay simply keeps pace with inflation, you’re likely to hand over more in tax each year.”
Impact on Higher Earners
Ms Coles warned that higher earners are firmly in the frame for tax attacks. “The better your income, the worse your tax bill, and the more that frozen tax thresholds will have syphoned from your pay packet. The highest earners, including the so-called ‘Henrys’ (high earners, not rich yet) shoulder a huge tax burden – in fact those earning over £70,000 pay almost 58% of all tax.” She also noted that “the more you earn, the more interest and dividends you’re likely to make, and the higher the rate you pay on them”.
Stealthy Tax Creep
Ms Coles emphasised that “the stealthy income tax creep has already devoured thousands of pounds of your money, but it’s going to consume more as time goes on”. With thresholds frozen until 2031, even if pay only rises with inflation, “you stand to hand over more of your income in tax with every passing year”. She advised that “you get tax relief at your highest marginal rate, so contributions over the higher rate threshold are particularly rewarding”.
