State pensioners are facing a record £29.8 billion income tax bill for the 2024-25 tax year, marking a rise of more than 40 per cent in just two years, according to official data from HMRC. Nearly 9.5 million pensioners are now expected to pay tax, representing almost a quarter of all taxpayers above state pension age. This increase is attributed largely to the continued freezing of tax thresholds and allowances, which has dragged more pensioners into paying income tax and pushed many into higher tax brackets.
Labour Party leaders, including Prime Minister Andy Burnham and Chancellor John Healey, have announced a commitment to uphold a promise made by Rachel Reeves in the autumn: state pensioners whose only income is the state pension will not pay income tax on their payments. However, millions of pensioners with other forms of income remain subject to increased taxation.
Sir Steve Webb, a former pensions minister, highlighted the growing tax burden on pensioners, stating, “These figures show that the amount of income tax pensioners are paying on their pensions has soared in recent years. The constant freezing of tax thresholds and allowances has dragged more and more pensioners into tax, and more into higher rates of tax.”
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He added, “In discussions about fairness between generations, what is often overlooked is how much pensioners contribute back into the system. Although pensions have been increasing, a larger share is being returned to the Government through higher income tax receipts.”
Financial expert Andrew Tully of Nucleus Financial echoed these concerns, noting, “This deep freeze means many more people are paying income tax who never used to, while millions more are paying higher-rate tax when historically they only paid basic rate tax. Pensioners will also be affected by these changes, and as the state pension increases in line with the triple lock, more of their other income will be exposed to higher tax rates.”
Sir Steve Webb suggested that the Government may have to accept the rising cost of tax relief for the time being.
A Treasury spokesperson emphasised that those whose sole income is the full new or basic state pension will not pay income tax and confirmed this commitment will remain throughout the current Parliament. They also highlighted that by maintaining the triple lock, 12 million pensioners will receive income increases of up to £470 this year and will continue to benefit from the highest personal allowance in the G7.
“Although pensions have been going up, a growing proportion is coming back to the Government in increased income tax receipts.” - Sir Steve Webb