Over One Million Pensioners Now Paying 40% Tax

Key Takeaway

More than one million UK pensioners now pay 40% or 45% income tax, more than double the number five years ago. This shift is driven almost entirely by frozen tax thresholds and rising pension incomes, creating a significant planning challenge for retirees.

1. What’s Happening?

Recent figures obtained by LCP show a sharp rise in the number of pensioners paying higher‑rate tax:

• 494,000 pensioners paid 40% or 45% tax in 2021/22.

• 1.092 million are paying these rates in 2026/27.

• The number paying the 45% additional rate has roughly trebled.

This trend is accelerating and is expected to continue throughout the decade.

2. Why Are More Pensioners Paying Higher‑Rate Tax?

Frozen thresholds (fiscal drag)

• Personal allowance frozen at £12,570.

• Higher‑rate threshold frozen at £50,270.

• Additional‑rate threshold cut from £150,000 to £125,140.

With thresholds static until 2030, more income is being pulled into higher tax bands each year.

Rising pension incomes

• State Pension increases via the triple lock.

• DB and DC pensions uprated for inflation.

• Many retirees now have multiple income sources (State Pension + DB + drawdown + rental income).

The result: pension income is rising while tax thresholds stand still.

3. Why This Matters for Clients

Many people assume they will be basic‑rate taxpayers in retirement. Increasingly, this is no longer true.

Key implications

• A larger share of retirement income is taxed at 40% or 45%.

• Net retirement income may be significantly lower than expected.

• Some clients may need higher levels of saving pre‑retirement to achieve target income.

• Drawdown strategies may need revisiting to avoid unnecessary higher‑rate exposure.

• Couples may benefit from income equalisation to reduce overall tax.

4. Planning Considerations for Advisers

Income structuring

• Use phased drawdown to manage taxable income.

• Consider ISA funding to create tax‑free buffers.

• Review DB commutation options where appropriate.

Tax‑efficient withdrawal sequencing

• Blend State Pension, DB, DC, and ISA withdrawals to stay below thresholds where possible.

• Avoid “cliff‑edge” withdrawals that push clients into 40%+ tax unnecessarily.

Pre‑retirement actions

• Increase pension contributions to offset future tax drag.

• Consider salary sacrifice to reduce taxable income pre‑retirement.

• Maximise ISA allowances for future tax‑free income.

Couples planning

• Equalise pension pots to reduce higher‑rate exposure.

• Transfer assets where appropriate to balance taxable income.

5. Outlook: Trend Set to Continue

The Government has already confirmed that tax thresholds will remain frozen until 2030. This means:

• More pensioners will enter higher tax bands each year.

• The proportion paying 40%+ tax is likely to rise well beyond one million.

• Retirement plans built on basic‑rate assumptions may become increasingly unrealistic.

Clients should be encouraged to revisit retirement income plans regularly.

6. Summary

Because tax thresholds are frozen but pensions keep rising, more retirees are being pushed into higher tax bands. Over a million pensioners now pay 40% or more in tax, and this number will keep increasing. Planning your withdrawals carefully can help reduce how much tax you pay in retirement.

7. FAQs

Why am I paying 40% tax when I never did during my working life?

Because your pension income has risen with inflation, but tax thresholds have not. This pushes more of your income into higher tax bands.

Will this continue?

Yes. Thresholds are frozen until 2030, so more pensioners will move into higher‑rate tax each year.

Can I reduce the amount of tax I pay?

Often yes. Withdrawal sequencing, ISA use, income equalisation, and phased drawdown can all help.

Does this affect the State Pension?

Yes. The State Pension counts as taxable income and can push you into higher tax bands.

Should I change my retirement plan?

Most clients benefit from a review, especially if their plan assumed basic‑rate taxation.