Pension savers warned ‘your tax bill will increase’ as 8.2 million dragged into net | Personal Finance | Finance

Millions more Britons, including pensioners, are being pulled into paying tax as frozen thresholds continue to bite, new HMRC figures reveal. The latest Personal Incomes Statistics release from the UK’s tax, payments and customs authority has shown that there were 36.7 million taxpayers in the 2023/24 period – up by 2.2 million in just a year.

Among them are almost 8.2 million people of state pension age now paying income tax – an increase of more than one million. At the same time, 7.8 million people are paying tax on pensions as their main source of income. The figures highlight the growing impact of “fiscal drag”, in which tax thresholds remain frozen while incomes rise, pulling more people into higher tax bands. Now, Sarah Coles, head of personal finance at AJ Bell, has warned that this pressure is only set to intensify.

“Almost 8 million people relying on their pension for their main source of income are handing over £24 billion in tax every year – nearly half a million of whom are paying higher-rate tax,” she said. “Frozen tax thresholds mean this is only going to get worse for everyone. Even if your pay simply keeps pace with inflation, you’re likely to hand over more in tax each year.”

The data highlights how heavily the tax system relies on higher earners. While just over eight-in-10 (80%) of taxpayers are basic-rate payers, they account for only 30% of total income tax. By contrast, 16% of higher-rate taxpayers contribute around a third, while a small group of additional-rate taxpayers (2.4%) account for just under 38% of all tax paid.

Those earning around £70,000 are already among the UK’s highest earners, with incomes of £67,400 placing individuals in the top 10%. The threshold rises to £93,600 to reach the top 5%, while earnings of £207,000 or more put taxpayers firmly in the top 1%.

Ms Coles said: “Higher earners are firmly in the frame for tax attacks. The better your income, the worse your tax bill, and the more that frozen tax thresholds will have syphoned from your pay packet. The highest earners, including the so-called ‘Henrys’ (high earners, not rich yet) shoulder a huge tax burden – in fact those earning over £70,000 pay almost 58% of all tax.

She explained that income tax is not the only factor affecting wealthier households. On average, savers earning £50,000 or more make over £1,000 in interest, which can trigger income tax if held outside a Cash ISA. Investors on similar incomes also earn more than £19,500 in dividends on average, meaning “some significant bills” if these are held outside a Stocks and Shares ISA. She added that “the more you earn, the more interest and dividends you’re likely to make, and the higher the rate you pay on them”.

She also warned that “the stealthy income tax creep has already devoured thousands of pounds of your money, but it’s going to consume more as time goes on”, pointing out that with thresholds frozen until 2031, even if pay only rises with inflation, “you stand to hand over more of your income in tax with every passing year”.

Ms Coles said this is why tax planning has become increasingly important for higher earners, highlighting pension contributions as one of the most effective ways to control a bill.

She noted: “You get tax relief at your highest marginal rate, so contributions over the higher rate threshold are particularly rewarding,” before adding that while this “won’t leave you with more money in your pocket today”, it does mean “giving less of it to the taxman, and squirrelling away more of it for a better quality of life later on”.

Experts have said careful planning is now essential to avoid paying more than necessary.

Pension contributions remain one of the most effective ways to reduce tax, as savers receive relief at their highest marginal rate. Using ISAs can also shield income from the taxman. A Cash ISA protects savings interest from tax, while a Stocks and Shares ISA shelters both dividends and capital gains.

Couples can also reduce their overall bill by spreading assets between partners, particularly if one partner pays a lower tax rate.

The number of pensioners paying tax is expected to keep climbing, with thresholds frozen until 2031.

“The tax bill for pensioners is only going to increase. Rising pension incomes are pushing more people into tax-paying territory, and that trend will continue, Ms Coles added. “It makes it crucial to think about retirement income as a whole. Combining pensions with ISAs can give you flexibility to draw some income tax-free and manage your overall liability.”