New data has been released
Retired people paid approximately £8bn in additional tax last year after a freeze on personal allowances pushed individuals into higher tax brackets, according to newly released figures. The total tax paid by those in retirement rose from £21.1bn to £29.8bn, a surge of more than 40 per cent in just two years, based on the latest pension participation data from HMRC.
Industry experts attributed the increase to so-called fiscal drag, whereby people have been drawn into higher tax bands as thresholds and personal allowances remain frozen.
Steve Webb, partner at LCP and former pensions minister, said: “The constant freezing of tax thresholds and allowances has dragged millions more people into paying higher rates of income tax. The flip side of this is that when they pay into a pension they get more tax relief, leading the cost of tax relief to soar.
“But frozen personal allowances mean that the number of pensioners paying income tax has also written steeply, and the tax bill on pensioners is up dramatically. In all the discussion about fairness between generations it is important to remember that pensioners are also paying growing amounts back to the exchequer.”
The number of higher rate taxpayers reached 6.6m during the last financial year, pushing up the cost of tax relief on pensions. The total bill for income tax relief on pensions leapt from £47.8bn in the 2023/24 tax year to £60.4bn in 2024/25, HMRC confirmed, as reported by City AM.
Webb noted that while the government might be inclined to cut tax relief to reduce this expenditure, doing so is “very difficult halfway through a Parliament”.
“Any change would be complex and technical and could take years to implement. It would deliver little money this side of the next election but would be hugely politically unpopular. The Government may well conclude that it simply has to live with the rising cost of tax relief for now,” he said.
Pension participation across the UK remained robust last year as the earnings threshold required to qualify for auto enrolment continues to be frozen. In the UK, employees aged over 22 and below state pension age become eligible upon earning £10,000 annually. The trigger has remained frozen since the 2014/15 tax year, despite both the general and minimum wage rising considerably.
Approximately 90 per cent of eligible employees contributed to a workplace pension in 2025, representing 22.6m eligible individuals choosing to save into a pension pot, according to the most recent figures from the Department of Work and Pensions. This represents a rise of 0.6m compared to 2024.
Despite a growing number of people qualifying for auto enrolment, certain groups continued to display a persistent participation gap. Around 45 per cent of eligible employees working for a micro employer — those with fewer than five members of staff — in the private sector are not contributing to a workplace pension. Industry experts have also sounded the alarm over the self-employed, who do not automatically qualify for the scheme, while those earning below the threshold are failing to save sufficiently — or not saving at all — leaving them vulnerable to poverty in retirement.
Although the department initially attributed the lack of engagement to the pandemic and the cost of living crisis, the reluctance to save has endured, with the opt-out rate rising to 12 per cent last year.
Rebecca Williams, financial planning divisional lead at Rathbones, said: “It’s notable that opt-out rates have edged higher. Cost-of-living pressures continue to squeeze household finances, making long-term saving harder for some people to prioritise.
“Meanwhile, lower participation among some groups and employees working for the smallest businesses shows there is still work to do to make retirement saving truly universal.”
