Nearly 80,000 pensioners were caught in a quirk of the earnings system and hit with an effective tax rate of 60% last year, according to new data.
HMRC set to punish state pensioners with 60% tax bill thanks to rule ‘quirk’
State pensioners are being slapped by a “punishing” 60 per cent tax sting. Nearly 80,000 pensioners were caught in a quirk of the earnings system and hit with an effective tax rate of 60% last year, according to new data.
A total of 77,000 Brits at state pension age – currently 66 years – and above were dragged into what is known as the 60% tax trap in 2024/25, affecting those with incomes of between £100,000 and £125,140.
Craig Rickman, pensions expert at Interactive Investor, said: “More people now work well into their late 60s, including high earners at the peak of their careers. They often enjoy their work, and the continued sense of purpose, so want to carry on consulting or running a business until well into their golden years.
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“However, there’s a risk that ultra-high tax rates could mean losing older talent. As taxes take an even bigger bite from the cherry, many older high earners will weigh up whether they’re better off stepping back and earning less, rather than risk facing such a heavy tax burden.”
Rickman said: “This data reveals the punishing impact of the 60% tax trap on older workers, as frozen tax thresholds pull more pensioners’ incomes into six-figure territory.
“If the tax-trap threshold had kept pace with inflation, workers would now be able to earn £155,000 before being hit with 60% income tax.
“With the deep freeze on income tax bands set to endure until 2028/29, and fears the government could extend it even further, thousands more people above state pension age will be hit with punitive rates of tax on some of their income.”
Rickman said: “Paying into a pension to bring your income below £100,000 can attract 40% income tax relief and enable you to keep your personal tax-free allowance.
“Just don’t forget to include the pension contribution on your tax return if it goes into a private pension, like a self-invested personal pension (Sipp) – also known as a pension pot for life – as you only receive the 20% basic-rate relief upfront.”