More than 1 million state pensioners in the United Kingdom are set to receive unwelcome news from HM Revenue and Customs (HMRC). These pensioners are among the 2,640,000 taxpayers who will incur income tax on interest earned from cash savings in the current financial year. This increase in tax liability is largely attributed to rising interest rates coupled with frozen tax thresholds, which have led to a significant escalation in the number of pensioners facing tax bills.
As of the current financial year, the number of state pensioners over the age of 66 who are liable for tax on their savings income has more than doubled since the 2022-23 fiscal year. Data from HMRC indicates that approximately 1,160,000 individuals will be required to pay tax on their savings income in the years 2025 and 2026.
Rising Numbers of Taxpayers
The figures, obtained by the investment platform AJ Bell, reveal a troubling trend for pensioners. Of those affected, more than 80,000 will face a tax rate of 45% on the interest earned from savings held outside of cash ISAs, which are tax-exempt accounts. This marks a steep increase from just 33,000 individuals three years ago. The number of pensioners incurring a tax liability has surged dramatically, rising from 493,000 in 2022-23 to 953,000 in 2023-24, and further to 1,090,000 in 2024-25.
The total number of taxpayers facing tax on savings has spiraled in recent years, primarily due to the combination of increased interest rates and static tax thresholds. Charlene Young, an expert from AJ Bell, emphasized the common practice among retirees to hold more cash as they look to manage their investments.
Impact on Retirement Finances
Young noted, “In retirement it is common to hold a little more cash. People often want to de-risk some of their investments and those with a good handle on their spending needs might look to build a cash flow ladder or funnel to match what they’ve got planned for the next few years.”
Unfortunately, this approach is leading to an increasing number of pensioners facing unexpected tax bills, with many being pushed into higher tax bands as a result. The situation underscores the challenges many retirees face as they navigate their financial landscapes in a fluctuating economic environment.
The implications of these tax liabilities are significant, reflecting broader trends that may impact the financial stability of pensioners across the UK. As more individuals find themselves in this predicament, the conversation surrounding retirement savings and tax policy will likely grow in urgency.
