A growing number of pensioners are now paying income tax, with the state pension making up 95% of the personal allowance.
Figures published by HM Revenue & Customs showed there were 7.13 million taxpayers of pension age for the 2022/23 tax year, an increase of 5.7% compared to the previous tax year. Given this is a lagging indicator, Quilter said the real figure is likely now much higher as the state pension has increased while the personal allowance has been frozen.
In the 2022 to 2023 tax year, the full rate of the new state pension was £185.15 per week, or £9,627.80 per year, which accounted for just over three quarters of the £12,570 personal allowance. Comparatively, in the 2025 to 2026 tax year, the full new state pension has risen to £230.25 per week or £11,973 per year. This uses 95% of the personal allowance, leaving just £597 of available income before someone starts paying income tax.
Shaun Moore, tax and financial planning expert at Quilter, said: “This increase in the state pension will no doubt have resulted in a considerable proportion of pensioners being dragged into paying tax.
“With the triple lock still in place, if the state pension continues to rise by at least 2.5%, by the 2027 to 2028 tax year the state pension will surpass the £12,570 personal allowance and will see all pensioners in receipt of the full new state pension forced to hand some of it back.
“Pensioners are often among the worst hit by frozen tax allowances because they typically will be getting their income from a number of different investments and therefore lean heavily on CGT and dividend allowances to help create a retirement income in addition to their pension. However, the Government has made it very difficult to avert being taxed very heavily on these types of investments. It is vital that people look across the spectrum of financial products that provide tax efficiency and use them in the right way and at the right time to try to prevent their income being eroded by tax.”
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