One million pensioners face unprecedented tax demands after being caught in a trap of frozen thresholds, bombshell figures reveal. Rachel Reeves’s decision to maintain the freeze on income tax bands has seen a record number of retirees dragged into paying the 40% higher rate.
Worryingly, they are being clobbered by a “triple whammy” on their savings – costing them hundreds of pounds a year. Pensioners forking out the higher rate lose half of their “personal savings allowance” to set against interest income. This costs up to £200 per year just for going £1 over the threshold.
Being in this bracket also means that a person’s capital gains tax rate jumps up from 18% to 24% – an increase of a third.
The HMRC figures were unearthed in a Freedom of Information request by former pensions minister Sir Steve Webb.
The personal allowance and higher tax band were frozen by the Tories in March 2021, and extended by two years in 2022 until 2027-28.
Chancellor Ms Reeves kept the freeze during last autumn’s nightmare Budget, when she also inflicted further financial misery by stripping away winter fuel payments.
That was widely seen as contributing to a dramatic Labour slump in the polls, with the party hammered at the local elections earlier this month.
Sir Steve, now a partner at consultants LCP, said the higher rate threshold has become a “cliff edge”.
“There has been a significant increase in the number of pensioners paying income tax at all rates, but the rise has been greatest in the numbers paying income tax at the higher rates,” he warned.
“This has more than doubled from under half a million four years ago to over a million now. “Not only does this mean more tax on things like income from state and company pensions, it also means these pensioners are paying more tax on their savings, as their personal savings allowance is cut, and a higher rate of capital gains tax – a triple whammy.
“The higher rate threshold has become a real cliff edge over which growing numbers of pensioners are falling.”
According to the figures, almost 7.8million state-aged pensioners pay the basic tax rate of 20%.
Just over 900,000 are in the 40% band, while 124,000 shell out the 45% additional rate – more than triple the amount in 2021-22.
The data reveal that the total number of pensioners paying income tax at all has risen by around two million in four years, from 6.7million in 2021-22 to 8.8million in 2025-26, an increase of nearly one third.
However, the total number of pensioners paying at 40% or above has doubled over this period.
In 2021-22, the figure was just under half a million (494,000), but this year it has gone through the one million mark (1,028,000).
The proportion of tax-paying pensioners who pay at 40% or more has risen from around one in 14 in 2021-22 to around one in nine this year.
Sir Steve says the increase is the result of the continued freeze in the income tax personal allowance and higher rate threshold combined with significant above-inflation increases in the rate of the state pension plus other inflation-linked pension increases.
Shadow Pensions Secretary Helen Whately said: “After punishing pensioners by ripping away their winter fuel allowance, this is the latest slap in the face from Starmer.
“We had plans to ensure the state pension was exempt from income tax, and this shows why.
“Pensioners who have worked hard all their lives deserve better than a Labour Government hell bent on taxing them by any means necessary.”
The Department for Work and Pensions has been contacted for a comment.
The findings come as the Chancellor sidestepped calls to help those in fuel and food poverty by reversing winter fuel allowance cuts and the two-child benefit cap.
The Chancellor said she would “never” make a policy commitment without being able to say where the money is coming from after claiming the Government has “returned stability back” to the UK economy.
Ms Reeves also said the Government had to take “difficult decisions and urgent decisions” following last summer’s election as she responded to MPs urging her to change course.
Reports have suggested ministers could reconsider its decision to means-test the winter fuel payment for pensioners, as a means of placating rebellious Labour MPs.
Ms Reeves told LBC that she is “listening” to the concerns “about the level at which the winter fuel payment is removed”, which hinted at possible changes to the threshold.
Speaking at Treasury questions, Independent MP Rosie Duffield (Canterbury) told the Commons: “Westminster is once again buzzing with the latest U-turn speculation and briefings over the Chancellor’s policies on the winter fuel allowance and the two-child limit benefits cap.
“It’s less of a buzz for those visitors to Canterbury Food Bank, however, who last month distributed enough food to make 13,545 meals – a 47% rise on the same period last year.
“Will the Chancellor end the serious anxiety of those experiencing fuel and food poverty now and reverse those policies?”
Ms Reeves replied to her former Labour colleague: “The only reason that we’ve been able to grow the economy and get those cuts in interest rates, which helped working families in Canterbury and right across our country, is to have returned stability back to our economy and that means never making a policy commitment without being able to say where the money is coming from; that is what got our country into a mess under the previous government.
“So we’ve set out the policies that we needed to put investment into the NHS and to secure our public finances.”
