HMRC’s decision to freeze income tax thresholds since 2021 is impacting over eight million state pensioners, causing many to face higher tax bills. Recent HMRC data reveals that 8.2 million people of state pension age are now paying income tax, with numbers steadily rising.
This freeze has led to what experts call “fiscal drag,” where inflation and income growth push taxpayers into higher tax brackets without any real increase in their earnings. As a result, pensioners and other taxpayers find themselves paying more tax year after year, even though their purchasing power hasn’t improved.
David Little, partner at wealth management firm Evelyn Partners, explained, “Fiscal drag is increasing the UK tax burden by moving millions into higher tax brackets and causing some people to pay tax for the first time. Both the number of taxpayers and the total tax collected are climbing annually, just as chancellors have aimed.”
READ MORE: West Midlands Pensioners Charged with Murder, Rape, and Violent Attacks
READ MORE: HMRC Alters Tax Bands, Impacting One Million State Pensioners
Sarah Coles, head of personal finance at AJ Bell, highlighted the scale of the issue: “Nearly eight million pensioners rely on their pension as their main income and collectively pay £24 billion in tax annually. Alarmingly, almost half a million of these are paying the higher-rate tax. With frozen thresholds, this trend will worsen, even if incomes only rise in line with inflation.”
Coles further pointed out the impact on higher earners, noting, “Higher income earners face the greatest tax increases. Frozen thresholds mean that as your income grows, you’ll contribute a larger portion in taxes. Those earning over £70,000, referred to as ‘Henrys’ (high earners, not rich yet), bear almost 58% of the total tax burden.”
She also emphasized that the growing tax burden extends beyond income tax to include interest and dividends, which are taxed at higher rates for those with greater earnings. “The gradual creep in income tax has already cost many thousands of pounds, and with thresholds frozen until 2031, this will only escalate,” Coles warned.
In conclusion, pensioners and taxpayers alike should be aware that without adjustment to the thresholds, rising incomes—even if matched only by inflation—will continually push them into higher tax bands, increasing their annual tax payments significantly.