New figures have confirmed what many retirees are starting to feel in their bank statements.
The number of pensioners paying income tax at 40 per cent or 45 per cent has surpassed one million this current tax year, up from just 494,000 in the 2021/22 tax year.
The rise has been even sharper at the very top, where the number paying the additional 45 per cent rate has roughly trebled during this period, rising to 115,000 up from 39,000 five years ago.
The figures come from a Freedom of Information request submitted by former pensions minister Sir Steve Webb.
He points out that many people of working age expect to be basic rate taxpayers in retirement, but few expect to find themselves paying 40 per cent or more out of their pensions in tax.
Why is this happening
The cause is not a change in tax rates, but a freeze. The personal allowance has been held at £12,570 and the threshold at which the 40 per cent higher rate begins has stayed at £50,270, while the additional rate threshold was cut to £125,140 from 2023/24.
Meanwhile, state pensions and many occupational schemes have continued rising with inflation.
Added to this, many people now enjoy phased retirement where their pension income is combined with earnings from their regular profession.
As pension incomes climb and the thresholds stay still, growing numbers of retirees are pulled into bands they never expected to reach due to fiscal drag.
The situation looks set to continue, with the freeze on income tax thresholds now extended until the 2030/31 tax year.
For anyone with income beyond the state pension, whether from a workplace pension, a SIPP, rental income or investments, the risk of drifting into a higher band is only going up.
What pensioners can do about it
The good news is that a higher tax bill is rarely inevitable and a few practical steps can make a real difference.
Reviewing how and when pension income is drawn matters more than ever, as taking large lump sums or high withdrawals from a SIPP in a single tax year can tip total income over the higher rate threshold.
Even where the underlying pension pot is fairly modest, spreading withdrawals across tax years can help keep more income within the basic rate band.
Using tax free wrappers alongside pension income is also worth exploring. Money held in an ISA does not count towards taxable income, so drawing from savings held there rather than a pension in a high income year can reduce the amount taxed at the higher rate.
Couples should also check whether both partners are making full use of their own personal allowances and basic rate bands, since income and assets can often be structured more efficiently between spouses or civil partners.
Given how quickly the numbers affected have grown, this is not a problem confined to wealthy retirees.
Anyone drawing a private pension alongside the state pension should have their income reviewed to understand where they sit against the thresholds to see how they can reduce their liabilities.
Speak to our team to review your retirement income to make sure you are making the most of the opportunities available to you.
