The number of pensioners paying the highest rates of income tax has doubled over the past five years, as frozen tax thresholds pull increasing numbers of Britons into higher bands.

According to a freedom of information request submitted by pension consultants LCP, the number of pensioners paying income tax at 40 per cent or 45 per cent has passed one million in the current tax year. By comparison, just 494,000 retirees were paying at these rates in the 2021/22 tax year.

The number of pensioners paying the additional rate of 45 per cent has roughly trebled over the same period, rising from 39,000 five years ago to 115,000. Meanwhile, the number of pensioners paying the additional rate at the lower, basic level has remained comparatively small, increasing from 6,250 to 8,480.

Frozen thresholds

The growth in higher-rate taxpayers follows former chancellor Rachel Reeves' decision to extend the freeze on current tax thresholds until the end of the decade in the 2025 Autumn Budget — despite having previously described the freeze as a "stealth tax".

Income tax thresholds have historically risen in line with inflation so that workers receiving pay rises keep pace with the rising cost of living. When thresholds are held fixed instead, rising incomes are taxed more heavily over time — a mechanism known as fiscal drag, and one that successive freezes have made a significant driver of the UK tax burden.

The threshold at which the 40 per cent higher rate of income tax begins has been frozen at £50,270 since 2021/22. The starting point for additional-rate taxpayers has been frozen at £125,140 since the 2023/24 tax year.

The combination of these freezes with significant increases to the state pension under the triple lock policy has drawn more pensioners into higher tax bands. Pensioners are particularly exposed to this dynamic because — unlike employees — much of their income comes from the state pension and pension drawdowns that rise with the triple lock or investment returns, while their tax-free personal allowance and band thresholds stay still.

Under the triple lock, the state pension rises each April by whichever is highest: average wage growth, inflation, or 2.5 per cent.

"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," said Steve Webb, former pensions minister and partner at LCP.

An accelerating trend

Reeves' decision to extend the income tax threshold freeze until the 2030/31 tax year is expected to accelerate the trend.

This is because the frozen tax band has drifted into a dense part of the pensioner income distribution, meaning even a small increase in pension income will push a wave of Britons over the threshold at once.

The Treasury estimates the extended freeze will raise roughly £12bn in extra revenue. The threshold freeze is a recurring feature of recent fiscal policy rather than a one-off: freezes first announced under chancellors Rishi Sunak and Jeremy Hunt were extended repeatedly as the government sought to repair the public finances, and each extension has broadened the number of people affected.

"Those who are planning their retirement finances will increasingly need to allow for the fact that a significant chunk of the income they planned to live on will be taxed at 40 per cent…for some that means more pension saving will be needed today to compensate," Webb said.