Retirees forced to pay tax on ‘modest’ pension incomes as seven million ‘dragged’ into HMRC net

The number of people paying income tax in Britain has surged by seven million since thresholds were frozen in 2021/22, with 40 million individuals now contributing to the Treasury’s coffers in the current tax year.

The income taxpayer count rose by 1.3 million in the past year alone, according to figures from AJ Bell citing Government data.

The freeze on tax thresholds, which began in April 2021, has effectively pulled millions of workers and retirees into the tax net as wages and pension payments have increased while the bands remained static.

This trend shows no sign of abating, with taxpayer numbers projected to continue climbing until the freeze ends in 2031.

Inheritance tax is also catching a growing number of estates as a result of the threshold freeze.

Some 32,000 estates faced IHT liability in 2025/26, representing an increase of 5,000 since both the nil rate band and residential nil rate band reached their current levels in 2020/21.

The situation is set to worsen considerably. From April next year, pensions will be factored into inheritance tax calculations for the first time, a change expected to pull an additional 10,500 estates into the IHT net in 2027/28.

This policy shift will also raise bills for 38,500 estates already liable, with the average increase estimated at £34,000 per estate.

| GETTY

Sarah Coles, head of personal finance at AJ Bell, highlighted the political longevity of these measures: “Income tax thresholds have been frozen to the spot since April 2021, and inheritance tax bands since April 2020 – both were three prime ministers ago.”

She noted that the freeze has particularly affected those on modest incomes: “In the 2021/22 tax year there were 33 million income taxpayers, and by 2025/26 there were 40 million.

“It means that as people have received pay rises or inflation-linked pension increases, millions have been dragged into paying tax. This includes an awful lot of pensioners living on very modest personal or workplace pensions.”

New government figures highlight the growing impact of fiscal drag on pensioners, with the number of retirees paying income tax rising by more than one million in a single year.

HMRC data shows 8.16 million people above state pension age paid income tax in 2023/24, up from 7.14 million the previous year.

| GETTY

With income tax thresholds frozen until April 2031, more pensioners are being pulled into paying tax for the first time, while others are being pushed into higher tax bands.

Research from pensions consultancy LCP previously found the number of retirees paying higher or additional-rate tax had doubled in four years to more than one million, equivalent to around one in nine pensioners.

Moving into a higher tax band can also reduce the personal savings allowance from £1,000 to £500 and increase the tax paid on savings interest and capital gains.

For those seeking to minimise their tax exposure, several strategies remain available.

Pension contributions offer tax relief at an individual’s highest marginal rate, while Cash ISAs can shield savings interest from taxation.

| GETTY

Those facing higher levies on investment returns may benefit from Stocks and Shares ISAs, which provide protection from both dividend and capital gains tax.

On the inheritance tax front, Ms Coles warned that inheritance tax is affecting a growing number of families as frozen thresholds fail to keep pace with rising asset values.

“The frozen nil rate bands mean that the increasing value of things like investments, savings and property automatically pushes more people into paying inheritance tax,” Ms Coles said.

She urged families to consider whether making gifts during their lifetime could help reduce a future inheritance tax bill.

She said: “It’s worth considering whether you can make any gifts during your lifetime to reduce a potential tax bill.”