More than 1 million pensioners could face 40% 'stealth' tax raid

More than one million pensioners will be dragged into paying 40% income tax this year - despite many having worked their entire lives with no expectation of such a hefty tax bill in retirement.

The soaring number caught in the bigger tax net is the direct result of a so-called "stealth raid" by the Treasury, as allowances remain frozen while pension incomes continue to rise.

Tax thresholds were frozen in 2021-22 by the then Conservative chancellor Rishi Sunak and then extended through to 2028 by Jeremy Hunt. Labour's Rachel Reeves continued the policy, and their are rumours she could extend the freeze further to 2030 amid a squeeze on Treasury finances.

Charlene Young, senior pensions and savings expert at AJ Bell, said: "Frozen allowances and tax thresholds have pulled more people into the tax system for the first time and hiked the rates of tax people pay as their income rises and they breach a new tax band."

She warned: "Pensioners are not shielded from it either - over one million people above state pension age will breach the higher rate 40 per cent threshold this tax year, more than double the number there were when the big freeze began."

The Personal Allowance - the amount people can earn before paying income tax - has been stuck at £12,570 since 2021 and will remain frozen until at least April 2028. Meanwhile, state and private pension incomes continue to climb, dragging more elderly savers into the tax net each year.

Figures from the Department for Work and Pensions show that 13 million people have reached State Pension age, with 8.51 million already paying income tax. The higher-rate threshold begins at £50,271 in England and Wales, while in Scotland a punitive 42% rate kicks in from £43,663.

Even the full 'new' state pension is now edging toward breaching the tax-free threshold. After April's 4.1% uprating, the full new pension now stands at £11,502. By 2027/28, Government forecasts suggest it will reach £12,578.80 - just above the Personal Allowance.

While the £78.80 excess may sound modest, any additional income from private pensions or workplace schemes can see pensioners paying significant tax, especially where income is not taxed at source under PAYE.

Charlene Young said: "The nation has fallen victim to the effects of fiscal drag in recent years.

"The UK Government is in a straitjacket thanks to its own fiscal rules, and these figures will bolster the arguments of those calling for state pension reform."

Labour has pledged to maintain the state pension triple lock - which guarantees annual rises based on earnings, inflation or 2.5%, whichever is highest - but has so far not committed to increasing the tax-free allowance.

Under current rules, the state pension age will rise from 66 to 67 between 2027 and 2028 - a move projected to save £10 billion in borrowing.

But critics say the system is no longer fit for purpose, with Young warning: "The full 'new' state pension is close to breaching the tax-free Personal Allowance, and many pensioners already receive well above this thanks to the way benefits could be built up under the old system."

She added: "Can the Government really continue to ignore calls for further reform?"

Pensioners worried about their tax liability can use tools on GOV.UK to estimate how much they might owe and how to make payments. However, campaigners say better communication and fairer thresholds are urgently needed to protect Britain's retirees from creeping tax raids.

There have been calls for the allowance to be raised to £20,000 yet the Treasury says this is unaffordable.

A spokesperson said earlier this year: "The Government is committed to keeping taxes for working people as low as possible while ensuring fiscal responsibility."