Most pensioners already pay tax on pension under Tories as Sunak's claim backfires

HMRC published figures today

The number of pensioners paying tax on their retirement savings has actually risen under the Tories, official figures have revealed today.

Amid the election debate around pensioners and tax, HMRC has today published its annual update of the number of pensioners paying income tax. The data revealed that there are 8.51million older Brits paying income tax on their pensions in 2024/25, which is up 660,000 from the 7.85million last year.

In 2020/21 - when the pension age rose to 66 years - there were 6.47million old Brits paying tax on their pensions. This means in the last three years 2million more pensioners were dragged into paying tax on the income they received from both the state and private pensions.

The figures emerged as the Tory party promised that no retirees would pay tax on their state pension, under a policy of the “triple lock plus“. Under the plans, the tax-free allowance for pensioners would rise in line with the existing triple lock. This would mean both the state pension and retirees’ tax-free allowance – currently £12,570 – would increase in line with inflation, average earnings, or 2.5%, whichever is highest.

However, a recent analysis from consultants Lane Clark & Peacock (LCP), found that around 2.5 million would still pay tax on their state pension even if the policy was put in place. LCP says this is because the Tory's model focused on the standard new state pension and ignored the fact that a large majority were on the "old" state pension system under the State Earnings-Related Pension Scheme (Serps).

The old basic state pension currently sits at £169.50 a week while the standard rate of the new state pension is £221.20. However, most people on the old state pension combine this income with SERPS. This means they often earn over £12,570 and have to pay tax. LCP added that although the full rate for the new state pension equates to around £11,500 a year, many pensioners actually get more than this from private pensions, meaning these people would continue to be taxpayers.

Sir Steve Webb, a former Liberal Democrat pensions minister who is now a partner at LCP said: "These new figures from HMRC are very timely and help to inform the debate about pensioners and tax. They show that a combination of frozen tax thresholds and significant increases in the state pension means the number of pensioners paying tax has continued to soar. But this is a continuation of a long-term trend which has seen the number of over-65s paying tax rise by around four million since 2010/11. For a pensioner in Britain, being an income taxpayer is now the norm rather than the exception."

The reason why pensioners are finding themselves being dragged into paying tax is through what's called "fiscal drag". This is where tax allowances are frozen while incomes continue to rise - the tax brackets have been frozen at their current levels since 2021. Chancellor Jeremy Hunt has reiterated his intention to keep the current tax thresholds frozen until at least 2028 with the Labour Party refusing to commit to ending the freeze if it wins next week's General Election.

Last night (June 27), Prime Minister Rishi Sunak claimed older Brits would be slapped with a "retirement tax" of £1,000 over the course of parliament if Labour wins. However, Sunak's claim that a future Labour Government would make sure “the state pension will be subject to a retirement tax" has been widely fact-checked for being inaccurate.

Although, both parties have committed to the Triple Lock for the state pension. This means that the number of pensioners starting to pay tax on their state pension will indeed rise if the income tax brackets remain frozen until 2028.