Wealthier pensioners could be hit with an average tax bill of around £2,500 if Chancellor Rachel Reeves goes ahead with a proposed rise in income tax, new analysis suggests.
The Treasury is understood to be considering a 2p increase in income tax, a move that would breach Labour’s manifesto pledge not to raise major taxes. Officials have reportedly examined options to increase income tax while cutting National Insurance by the same amount — a policy shift floated by the left-leaning think tank, the Resolution Foundation.
If implemented, the plan would raise an estimated £6bn in revenue but increase tax bills for millions of pensioners and landlords, who are not subject to National Insurance contributions.
According to HMRC data obtained under a Freedom of Information request by pension consultancy LCP, nearly 8.8 million state pensioners would pay more tax as a result of the change, including 124,000 higher earners who fall into the top 45p income tax rate.
The move would make Ms Reeves the first Chancellor to raise the basic rate of income tax since the 1970s.
Impact on retirees
A 2p increase in income tax would see a pensioner earning £125,140 or more pay an additional £2,502.80 a year, according to the analysis. For those earning above that threshold, the top marginal rate would rise to 47%.
Adam Cole, of wealth management firm Quilter, said the proposal could deepen financial pressure on older taxpayers who are already being pulled into higher tax bands due to “fiscal drag”.
“With more retirees being caught by frozen thresholds, a move like this could tighten the squeeze on affluent pensioners even further,” he said.
He added that, politically, such a change might be “more palatable” than introducing smaller, more complex tax tweaks or stealth increases.
However, pensioner advocacy groups have warned that the measure would unfairly burden older people living on fixed incomes.
David Luxton, of Later Life Ambitions, said it would be “grossly unfair” to impose a broad income tax rise on retirees.
“Many in later life live on a fixed income, and this kind of increase fails to recognise that pensioners often face rising costs,” he said. “It effectively penalises people with an extra charge for ageing.”
He added: “Pensioners have paid their dues through a lifetime of work and taxation. Asking them to shoulder yet another rise, when many already pay the highest rate, is unjust.”
Political and fiscal pressures
Labour’s manifesto ruled out increases to VAT, National Insurance, and income tax for “working people”, though Prime Minister Sir Keir Starmer stopped short of ruling out an income tax rise entirely when questioned in the Commons this week.
The government is grappling with a growing fiscal shortfall ahead of next month’s Budget, as it seeks to balance spending commitments with economic growth pressures.
Meanwhile, official figures show pensioners reclaimed £48.5m in overpaid taxes on pension withdrawals between July and September this year. Over the past decade, retirees have recouped more than £1.5bn after being incorrectly taxed on early pension withdrawals.
