Thousands on DWP State Pension given bad news | Personal Finance | Finance

Hundreds of thousands more pensioners will be forced to pay income tax this year — despite not being any better off — thanks to a stealth tax raid fuelled by frozen thresholds and rising state pension payments.

Figures from HMRC reveal that an estimated 420,000 more pensioners will fall into the tax net in 2025-26, taking the total number of over-65s paying income tax to 8.7 million — a jump of 5% in just one year. The surge is driven by the decision of the last Conservative government to freeze the personal tax thresholds at £12,570 in 2021 through until at least 2028 – a decision supported by the Chancellor Rachel Reeves in her first Budget.

The freeze on the threshold came at the same time as the value of the full state pension has soared by nearly 30% due to the ‘triple lock’. That guarantee, which boosts the state pension each year by the highest of wage growth, inflation or 2.5%, is now set to push many pensioners into paying basic-rate tax of 20%, even if their only income is from the state.

David Brooks, head of policy at Broadstone, told the Times: “While the country’s demographic shift naturally increases the number of pensioners liable for income tax, fiscal drag is unequivocally pulling hundreds of thousands more into the income tax bracket each year.”

In 2021, the full new state pension stood at £9,332.20. By this April, it had risen to £11,973 — just £597 shy of the frozen personal allowance. And within two years, the Office for Budget Responsibility predicts it will rise again to £12,885.50, exceeding the tax-free threshold by £315.50.

Wealth manager Quilter warns that pensioners receiving the full entitlement — after 35 years of National Insurance contributions — would be taxed £63 a year on their pension alone, without taking into account any other income such as savings, dividends or rental returns. Critics have long argued that this so-called ‘fiscal drag’ is a stealthy way for the Treasury to rake in billions, without raising tax rates outright.

Meanwhile, millions of workers are also being swept into higher tax brackets. The number of Britons paying 40% higher-rate tax is expected to hit 7.1 million this year, up from 5.1 million in 2022-23 — a staggering 39% increase.

Even more striking is the surge in those paying the 45% top rate: 1.23 million people will hand over nearly half their earnings above £125,140 this year, more than double the 570,000 from just three years ago. The number of basic-rate taxpayers has also climbed — from 28.8 million in 2022 to 30.8 million today.

Neela Chauhan, partner at accountancy firm UHY Hacker Young, said: “Though it might seem equitable for higher earners to be paying more tax, there are real concerns over the impacts of placing an ever higher tax burden on high earners. Increasing the tax burden too high could push these individuals to leave the country or deter talented individuals from moving to this country. There are already concerns of a ‘brain drain’ in the UK.”

Rachel Reeves has said the freeze on tax thresholds will end in 2028, however she is now under pressure to continue it through to 2030 in order to head off a black hole in government finances and stick to her fiscal rules.