Retirement is supposed to be the moment you finally escape the taxman’s grip, having spent decades handing over a chunk of every monthly payslip.
For hundreds of thousands of older Britons, that peaceful financial break is turning out to be wishful thinking, as the ongoing freeze on tax thresholds steadily pulls everyday pensions into the higher tax bands. Fresh Treasury figures reveal that more than 1 million pensioners are now handing over 40% or more of their income in tax, with the total number of retirees in the higher and additional rate brackets more than doubling in five years.
What used to be a problem reserved strictly for the wealthy is now catching out normal people with a decent workplace pension and a modest private nest egg. As fiscal drag quietly turns a comfortable retirement into a growing tax headache, working out how your private drawdowns, annuities, and state pension interact has never mattered more.
Why so many pensioners are ending up in the higher tax bracket
The main driver behind this change isn’t rising tax rates, but rather that the income thresholds at which people start paying more tax have stayed exactly the same, even as pension incomes themselves have grown. The personal allowance, the amount most people can earn before paying any income tax at all, has been frozen at £12,570 since 2021. The threshold at which the 40% higher rate kicks in has similarly been frozen at £50,270.
Meanwhile, the threshold for the additional 45% rate was initially frozen at £150,000, before being lowered further to £125,140 from the 2023/24 tax year onward. At the same time, the state pension has continued rising through annual uprating, and many workplace and private pensions have increased too. As a result, growing numbers of retirees are now crossing income tax thresholds that simply haven’t moved to reflect this. Economists refer to this effect, where rising incomes push people into higher tax bands purely because thresholds stay frozen, as fiscal drag.
Does paying higher rate tax mean your whole pension gets taxed at 40%?
One of the biggest misconceptions surrounding higher rate income tax is the assumption that once you become a higher rate taxpayer, your entire income suddenly gets taxed at 40%. That isn’t actually how it works.
Pensioners don’t pay 40% tax across their entire pension income once they cross the threshold. Instead, the higher rate only applies to the portion of taxable income above £50,270, with income below that threshold still taxed at the applicable lower rates. It’s also important to remember that the state pension counts toward someone’s total taxable income too, alongside any workplace pension, private pension, or other earnings. This means someone receiving the full new state pension, combined with income from a workplace or private pension, could easily find their combined total pushing them into the higher rate band, even if neither income source looks particularly large on its own.
A rough example of how this plays out in practice
To see how easily this can happen, consider someone receiving the full new state pension, alongside a modest workplace pension. Even a fairly ordinary combination of the two can tip a retiree’s total income past £50,270, meaning a portion of their pension income, not all of it, gets taxed at 40% rather than the lower basic rate.
This is precisely why so many people are caught off guard. Someone might have spent their working life as a basic rate taxpayer, never anticipating higher rate tax would apply once they stopped working, only to find a combination of state pension, workplace pension and any other income quietly pushes part of their retirement income into that higher band.
Why this is relevant to anyone still planning their retirement
Many people assume retirement will naturally mean paying less tax than they did during their working years. That assumption is becoming considerably less reliable though, as growing numbers of pensioners find themselves pulled into the higher rate band.
Plenty of people of working age likely expected to remain basic rate taxpayers once they retired, yet few would have anticipated paying 40% or more in tax on their pension income. That’s now the reality for well over a million pensioners, with that figure expected to keep climbing.
Anyone currently planning for retirement increasingly needs to factor tax properly into their calculations. A significant portion of the income someone expected to live on could end up taxed at 40% or higher, meaning some people may need to save considerably more during their working life just to maintain the same level of spending power once they retire. Ultimately, how much someone actually has available to spend in retirement depends not only on the size of their overall pension pot, but also on exactly how much tax they end up paying once they start drawing from it.
What this means for how you take money from your pension
Because higher rate tax only applies above the £50,270 threshold, the timing, and size of pension withdrawals can make a difference to how much tax someone ends up paying overall. Drawing a large lump sum in a single tax year, for example, could push total income for that year well above the threshold, even if spreading the same withdrawal across two tax years would have kept income below it in both.
This is one reason it’s worth thinking carefully about how and when pension income is drawn, rather than assuming the same approach suits everyone. Someone with multiple pension pots, or other sources of income alongside their pension, may have more flexibility to manage their total taxable income year by year than someone relying on a single, fixed pension income.
Is this trend likely to continue?
Everything currently points toward more pensioners being pulled into higher rate tax over the coming years. The government has already confirmed that the personal allowance and other income tax thresholds will remain frozen until 2030.
Unless that policy changes before then, growing numbers of pensioners are likely to be drawn into higher rate tax as the state pension and other retirement income continue rising, while the thresholds themselves stay exactly where they are. For anyone currently saving toward retirement, or already drawing a pension, it’s a trend to keep firmly in mind when working out how far that income will actually stretch.
