Pensioners in the UK paid approximately £8bn in additional tax last year as frozen personal allowances pulled more retirees into higher tax bands, according to new figures from HM Revenue & Customs (HMRC).

The total tax paid by people in retirement rose from £21.1bn to £29.8bn — an increase of more than 40 per cent over just two years — according to HMRC's latest pension participation data.

Industry experts attribute the surge to so-called fiscal drag, a phenomenon in which taxpayers are drawn into higher bands as income rises while thresholds and personal allowances remain fixed. The personal allowance has been held at £12,570 and the higher-rate threshold at £50,270 since 2021, with both scheduled to remain frozen through to April 2028.

The State Pension has meanwhile risen sharply under the government's triple lock commitment, which uprates the payment each April by the highest of earnings growth, inflation, or 2.5 per cent. The new State Pension increased by 8.5 per cent in April 2024 to around £11,502 a year and by a further 4.1 per cent in April 2025, leaving many pensioners whose only income is the State Pension plus modest private pension savings close to or above the personal allowance.

Steve Webb, partner at consultancy LCP and a former pensions minister, said: "The constant freezing of tax thresholds and allowances has dragged millions more people into paying higher rates of income tax. The flip side of this is that when they pay into a pension they get more tax relief, leading the cost of tax relief to soar."

"But frozen personal allowances mean that the number of pensioners paying income tax has also risen steeply, and the tax bill on pensioners is up dramatically. In all the discussion about fairness between generations it is important to remember that pensioners are also paying growing amounts back to the exchequer," Webb added.

The number of higher-rate taxpayers reached 6.6 million in the last financial year, which in turn has pushed up the cost of tax relief on pension contributions. HMRC reported that the cost of income tax relief on pensions jumped from £47.8bn in the 2023/24 tax year to £60.4bn in 2024/25.

Webb cautioned that while the government may be tempted to reduce tax relief to curb this rising cost, implementing such a change mid-Parliament is "very difficult."

"Any change would be complex and technical and could take years to implement. It would deliver little money this side of the next election but would be hugely politically unpopular. The Government may well conclude that it simply has to live with the rising cost of tax relief for now," he said.

Auto-Enrolment Threshold Remains Frozen

Pension participation in the UK stayed high last year, supported by the continued freeze on the earnings threshold for automatic enrolment eligibility.

Under current rules, employees over the age of 22 and below state pension age qualify for auto-enrolment once they earn at least £10,000 per year. That trigger has been frozen since the 2014/15 tax year, even as both the general minimum wage and the National Living Wage have risen. The frozen threshold has had the effect of progressively widening the pool of workers who qualify, as minimum wage increases push more low earners above the £10,000 trigger without any policy change.

Approximately 90 per cent of eligible employees saved into a workplace pension in 2025, equating to 22.6 million eligible individuals, according to the latest figures from the Department for Work and Pensions (DWP). That represents an increase of 0.6 million compared with 2024.

Despite broader gains in participation, several groups continue to show a persistent gap. Around 45 per cent of eligible employees at micro-employers — those with fewer than five staff — in the private sector are not saving into a workplace pension.

Industry figures have also warned about the self-employed, who do not automatically qualify for auto-enrolment. Those earning below the threshold are not saving enough, or at all, leaving them exposed to the risk of retirement poverty.

While DWP initially linked lower engagement to the pandemic and the cost-of-living crisis, the decision not to save has endured. The opt-out rate climbed to 12 per cent last year.

Rebecca Williams, financial planning divisional lead at wealth manager Rathbones, said: "It's notable that opt-out rates have edged higher. Cost-of-living pressures continue to squeeze household finances, making long-term saving harder for some people to prioritise."

"Meanwhile, lower participation among some groups and employees working for the smallest businesses shows there is still work to do to make retirement saving truly universal," Williams added.