There are now one million pensioners who pay higher rates, and their concerns extend beyond income tax

Although more people are now in higher tax brackets due to rising state pension payments, this could have an impact on other aspects of your finances as well

A million retirees have been forced into the higher rate tax thresholds for the first time due to frozen tax thresholds and state pension increases that are higher than inflation.

According to HMRC data that pensions consultancy LCP was able to obtain under the Freedom of Information Act, the number of pensioners who pay income tax at the higher 40 percent or 45 percent additional rate has passed the one million mark and doubled in just four years.

It comes as the contentious triple lock has caused state pension payments to rise faster than inflation.

Pensioners must be concerned about more than just the increased income tax rate, though.

Their investments and savings may be impacted by the increased income as well.

What percentage of pensioners pay the higher income tax rate?

Due to the triple lock calculations, the full new state pension as of April 2025 is 11,973, and there have been significant increases in recent years.

Tax thresholds that have been frozen have made this worse and created fiscal drag.

The current yearly state pension payments are pushing pensioners with other sources of income, like annuities or a buy-to-let portfolio, into higher tax brackets at a rapid pace, bringing them close to the personal tax allowance threshold of £12,570.

The total number of pensioners who pay income tax at all has increased by approximately 2 million in just four years, from 6.7 million in 2021 - 2022 to 8.8 million in 20252026a nearly one-third increase, according to the LCP research.

Nonetheless, during this time, the overall number of pensioners making payments of 40% or more has doubled.

According to the HMRC data, the number was just under half a million in 2021 - 2022, at 494,000, but this year, at 1,028,000, it has surpassed the one million mark.

Around 1 in 9 of taxpaying pensioners pay at least 40% this year, up from about 1 in 14 in 2021 - 2022, according to LCP.

Given that tax thresholds are maintained at their current level until 2028, this could rise even further if state pension payments keep rising.

The number of pensioners paying income tax at all rates has significantly increased, but the increase has been greatest for those paying income tax at the higher rates, according to Steve Webb, a partner at LCP. Compared to less than half a million four years ago, this has more than doubled to over a million today.

The consequences of having a higher pension rate.

Pensioners who move into a higher rate tax band will have to pay more tax to HMRC, which will reduce their retirement income.

There are additional repercussions, though.

Pensioners may wind up paying more taxes on their savings, Webb points out.

This is because, even if you hit the higher rate threshold, your personal savings allowance (PSA) decreases from 1,000 to 500.

A person who earns £1,000 in interest income annually and falls within the basic rate band is exempt from paying income tax on that interest, according to Webb. However, their PSA drops to 500 if they surpass the higher rate threshold by one.

This implies that the remaining £500 is taxable, and since their income tax rate is 40%, they must now pay £200 in interest taxes for a mere 1% increase in their income.

Pensioners who are selling assets like shares to pay for their retirement will also be impacted by being a higher rate taxpayer.

For the majority of gains, the standard individual capital gains tax (CGT) rate is currently 18 percent. However, only individuals who pay the basic rate of income tax are covered by this. Higher rate income taxpayers, even if they are only one dollar over the earnings threshold, must pay 24 percent CGT on all of their gains.

Webb continued: "Pensioners are paying a triple whammy of increased income tax, increased savings tax, and reduced personal savings allowance. An increasing number of pensioners are falling over the higher rate threshold, which has turned into a real cliff-edge.

Tips for lowering your tax liability.

By using your income wisely, you can attempt to lower your tax liability. For instance, you could control the amount of money you withdraw from your pension by using drawdown withdrawals to make sure you don't surpass various earnings caps.

This has gained more importance in anticipation of the 2027 amendments to the inheritance tax (IHT) regulations that will include pensions as a component of an individual's estate.

"We would always advise clients to consider the income tax they will pay when planning pension withdrawals," stated Gary Smith, financial planning partner at Evelyn Partners. Since more savers are looking to take larger amounts out due to the IHT measures, this question is becoming more significant.

You could also start saving and investing in an ISA that can be shielded from taxes, or you could use your spouse's allowances when buying assets if they make less money.

"If you are married or in a civil partnership, you can share assets between you and double the amount of money you can make before the taxman takes a slice," stated Sarah Coles, head of personal finance at Hargreaves Lansdown. To benefit from your personal allowance, dividend allowance, and ISA allowance, for instance, you and your spouse may divide income-producing assets.