Seven in 10 pensioners now pay income tax with threshold nearly level with full annual state pension

More than ten million pensioners are now paying income tax, setting a new record since thresholds were frozen five years ago.The personal allowance has remained £12,570 since 2021/22, and is catching ever more people in the tax net.More than seven in 10 pensioners are now taxpayers, according to Steve Webb, a former Pensions Minister and now a partner at consultant LCP.New official figures published by HMRC show the number of over-65s paying tax has risen by more than three million since the threshold freeze began, while other government figures suggest that around 12.2million are receiving a state pension, he says.Pensioners make up around one in four taxpayers as the freeze - which is due to last until 2031 - takes a toll across the board.Some 40.8million people in all are forecast to pay income tax in 2026/27, up from 36.7million three years ago. Tax freeze since 2021/22: More than seven in 10 pensioners is now a taxpayerThat includes 7.7 million higher rate taxpayers, an increase of 33.8 per cent in three years, and 1.29m additional rate taxpayers, up 44.4 per cent in that period.'A combination of a frozen tax-free allowance and significant year-on-year rises in the state pension and other sources of taxable income, alongside a rise in the size of the pensioner population, means that the number of taxpaying over-65s has risen dramatically in recent years,' says Webb, who is This is Money's pensions columnist.He also notes that from next April the standard rate of the new state pension, currently around £12,550 a year, will exceed the tax-free threshold for the first time.The Government plans to let older people off paying income tax if their only income is the state pension, but Webb says there are still no details on how this will work.He has previously called this a 'sticking plaster solution' that is 'deeply flawed', with the vast majority of Britain's pensioners not eligible.David Brooks, head of policy at financial services consultancy Broadstone, says: 'As the value of the state pension continues to increase, it is inevitable that more pensioners will pay income tax.'While this may feel unfair to some retirees whose income comes largely from the state pension, taxation is increasingly becoming the most cost-effective way for government to distinguish between those with more and less retirement income while preserving the universal nature of the state pension.'He adds: 'Pensioners are not a uniform group and, while some rely heavily on the state pension, many benefit from occupational and private pension savings built up over decades.'The policy challenge should not be preventing pensioners from ever paying tax, but reducing pensioner poverty and ensuring support is targeted at those who need it most.'Jason Hollands, managing director at wealth manager Evelyn Partners, says HMRC's statistics published today show how frozen income tax thresholds continue to pull millions more people into paying income tax and into higher tax bands.'The number of people paying income tax in this tax year is estimated to have risen by more than 18 per cent since 2022/23.'But more remarkably, over the same period the number of higher-rate taxpayers has soared by 51 per cent, while the number paying the additional rate has more than doubled – a 138 per cent increase.'Hollands adds: 'Freezing tax thresholds has been an especially effective way of driving tax revenues in years where earnings inflation has been significantly higher than it was before the pandemic.'Many people will be surprised to discover that they have become higher-rate taxpayers without feeling significantly better off in real terms.'Join the discussionIs it fair that more pensioners are being dragged into paying income tax as the cost of living rises?What's your view?Hollands says there are perfectly legitimate steps people can take to avoid paying more tax than necessary, including paying more into pensions to reduce taxable income and stop yourself drifting into a higher tax band.Others are sheltering more savings and investments in Isas, making full use of them if you are married or in a civil partnership, and transferring assets tax free between spouses.'Where one partner pays tax at a lower marginal rate, or has unused allowances, arranging investments so that income – or indeed capital gains - are generated in the most tax-efficient hands can reduce the family's overall tax bill.'Laura Suter, director of personal finance at AJ Bell, says: 'There’s one winner from this rising tax tide: the Government, as it rakes in more tax from the nation.'This year alone it’s expected the nation will pay £347 billion in tax – a cool £121 billion more than the last time tax thresholds increased in 2021/22.'Even in the past year alone, it’s expected that the Government will take in an extra £18 billion in income tax.'Suter says this highlights the conundrum for the incoming Prime Minister, Andy Burnham.'While the frozen tax bands are squeezing the nation’s pay packets until the pips squeak, they are a very lucrative source of income for the government – one it can ill afford to lose.'SIPPS: INVEST TO BUILD YOUR PENSIONAJ BellAJ Bell0.25% account fee. 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