State pensioners are being warned by personal finance experts, who are sounding the alarm over the impact of fiscal drag.
Thousands of state pensioners are set to be “dragged” into paying tax on payments. State pensioners are being warned by personal finance experts, who are sounding the alarm over the impact of fiscal drag.
HMRC data shows 37.7 million people paid income tax in 2024/25, marking a significant increase of six million taxpayers compared to 31.5 million in 2019/20. It’s all because of frozen tax thresholds, with the allowance staying put until 2028 under the Labour Party government.
The number of income taxpayers also rose by 1.4 million from the previous year. Clare Stinton, the head of workplace saving analysis at Hargreaves Lansdown, described the phenomenon as “fiscal drag in action – a stealth tax that quietly increases the tax burden across the board”.
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“Instead, millions on modest incomes have been dragged into paying tax for the first time,” Stinton said. “The cost-of-living crisis hasn’t gone away, and now lower earners must factor tax into their long list of essentials.
“With the freeze set to remain until 2028, the impact is only expected to deepen further. Pensioners face particular challenges from the frozen thresholds.”
“While that boost is welcome, it brings a new challenge: if the State Pension continues to rise at a similar pace, more retirees could soon find themselves crossing the personal allowance threshold and paying tax on their State Pension alone,” Stinton warned.
“This isn’t just about more people paying tax, it’s also that people will be paying more tax on a larger portion of their income,” Stinton added.
“Paying into your pension can help keep total taxable income below income tax thresholds, while at the same time boosting your retirement savings. A double win,” she said. “If you’re aiming for a retirement income that may exceed future tax thresholds, consider using ISAs alongside a pension,” Stinton advised.
She highlighted that income taken from an ISA is tax-free, which “can be used alongside a pension to give you much needed flexibility in managing your tax bill.”
