There has been a surge in the number of pensioners paying tax as well as a large growth in the number of people paying tax at the highest rates, according to figures from HM Revenue and Customs.
The figures, published today (June 29), revealed that in 2023/24 the number of over 65s paying income tax stood at 8.5mn, an increase of around 10 per cent on the 2022/23 figure of 7.73mn.
The figure of 8.5m is exactly double the number of taxpayers that were aged over 65 in 2004/05.
Meanwhile, the total number of taxpayers of all ages rose by 1.3mn to 35.9mn.
The data showed that slightly more women (0.7mn) than men (0.5mn) were dragged into the tax net.
Steve Webb, partner at LCP, said: “The surge in the number of pensioners paying income tax shows that the policy of freezing tax thresholds is really beginning to bite.
“A combination of high inflation and frozen tax allowances means that well over 8mn people aged 65 or over are now paying tax, a doubling in the last two decades.”
The data revealed that 55 per cent more people are expected to pay additional rate tax in 2023/24.
Webb said the number of pensioners paying tax will continue to increase rapidly in years to come, particularly if inflation remains relatively high and thresholds continue to be frozen.
“The freezes also mean far more people now paying a top tax rate of 45 per cent which was previously intended only for the very richest,” he said.
The figures showed that more people are paying tax at higher rates; with the numbers paying the top (45 per cent) ‘additional’ rate soaring from 555,000 to 862,000, while the numbers paying at the higher (40 per cent) rate rose from 5.28mn to 5.59mn.
LCP said the large rise in the number of older people paying tax will have been driven by the relatively large (10.1 per cent) increase in the state pension in April 2023, as well as inflation-linked increases to other pensions, at a time when the starting point for tax was once again frozen.
Laura Suter, head of personal finance at AJ Bell, said: “Government figures lay bare the real impact of the lowering of the additional rate income tax band from £150,000 to £125,140 at a time when wages are growing fast – with the number of additional rate taxpayers hitting 862,000, the highest ever.
“Since tax bands were frozen in 2021 there has been a 142 per cent increase in the number of individuals paying income tax at the 45 per cent rate, with an extra 373,000 people being pushed into paying the highest rate of tax on their income.
“But if we look back to when the Conservatives first came to power, during the coalition government in 2010, we’ve seen a near four-fold increase in the number of additional rate taxpayers, rising from 236,000 up to 862,000.”
Suter said the impact on higher rate taxpayers has been “more muted but still significant”.
This year the number of higher-rate payers is expected to hit its highest ever, with 5.6mn people paying tax at 40 per cent.
This represents a 29 per cent increase since tax bands were frozen in 2021, showing the extent to which the stealth tax has hit people’s pockets, Suter explained.
“Current high inflation rates mean more people are getting significant pay rises to try to keep pace with rising prices. But with income tax bands frozen it means many are being pushed into the next tax bracket.”
She added: “If we look over the longer term, there are now two million more pensioners paying income tax than there were when the Tories came to power in 2010. But one million of those have been dragged into the income tax net in the past two years alone, thanks to frozen tax bands.”
Future calculations
Interactive Investor put together some calculations showing how much tax different earners would pay.
It revealed that someone earning £20,000 in 2022/23 will pay £870 extra due to fiscal drag by 2028, equivalent to a 10p rise in income tax
Meanwhile, someone earning £50,000 in 2022/23 will pay £1,924 extra due to fiscal drag by 2028, equivalent to a 5p rise in income tax
Alice Guy, head of pensions and savings at II, said: “We’re living through worrying times when, despite rising costs, more pensioners than ever are expected to pay tax this year.
“The stark figures demonstrate the chilling effectiveness of freezing tax thresholds. The personal allowance has been frozen at around £12,500 since 2019 and is expected to remain at the same level until at least 2028.”
Guy said people often focus on how fiscal drag affects higher earners, but it actually costs lower earners more as they will see more of their income taxed at 20 per cent.
“Pensioners have limited options to increase their income and may wonder why they feel poorer each year,” she said.
“Yes, it’s partly due to the cost-of-living crisis, but it’s also because they are paying more tax as their pension rises with inflation. It feels like the taxman is squeezing the last dregs from the tube of toothpaste.
“With wages stagnating in real terms since 2008, the taxman is taking a bigger and bigger slice from the pie as time goes by.”
She explained that freezing tax thresholds is the government’s preferred way of increasing the tax burden and tax thresholds are expected to remain frozen until 2028.
“This policy has a painful impact in times of high inflation, as more of us are dragged into paying higher-rate tax,” she said.
“Not many people are going to sit down and check their pay slips, so fiscal drag largely slips under the radar.
“But it’s actually a huge deal, with income tax expected to rise the equivalent to a 5p tax rise for someone currently earning £30,000 by 2028 as more and more of their income becomes taxable.”
Interactive investor calculations showing fiscal drag equivalent to 10 per cent rise in income tax for lower earners:
Current earnings Mar 23 | Earnings by 2028 (adjusted for inflation) | Tax payable by 2028 | Tax payable by 2028 if thresholds increased with inflation | Tax payable by 2028 if thresholds increased and income tax rises to 21%/41% | Tax payable by 2028 if thresholds increased and income tax rises to 25%/45% | Tax payable by 2028 if thresholds increased and income tax rises to 30%/50% | Extra tax due to fiscal drag |
£15,000 | £18,244 | £1,816 | £946 | £975 | £1,094 | £1,241 | £870 |
£20,000 | £24,326 | £3,762 | £2,892 | £2,982 | £3,344 | £3,796 | £870 |
£30,000 | £36,489 | £7,654 | £6,784 | £6,996 | £7,844 | £8,904 | £870 |
£50,000 | £60,815 | £16,493 | £14,568 | £15,024 | £16,845 | £19,121 | £1,924 |
£100,000 | £121,629 | £46,361 | £40,078 | £41,141 | £44,576 | £51,038 | £6,283 |
£150,000 | £182,444 | £75,470 | £71,735 | £73,560 | £80,039 | £90,306 | £3,735 |
Assumptions and sources: Wage and tax thresholds adjusted in line with ONS CPI for Mar 23, OBR inflation forecast for 23/24 and then 2%
sonia.rach@ft.com
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