How retirees can fight Higher Rate tax in 2025: deferring State Pensions, strategic withdrawals, ISAs and more

With research revealing that the number of retirees paying Higher or Additional Rate tax has doubled in just four years, we look at ways you can cut your bill.

More than a million pensioners are now paying Income Tax at the Higher or Additional Rate, according to new research.

Worryingly, these numbers are twice those of the 2021/22 tax year, according to a Freedom of Information (FOI) request obtained by former Pensions Minister Steve Webb.

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Less wealthy also hit

Unsurprisingly, it isn’t just better-off retirees feeling the pinch.

According to the data, the number of pensioners paying Basic Rate Income Tax has risen by nearly a third during this period – from 6.7 million to 8.8 million.

In this article, we examine what these findings could mean for older people and explore four ways you could cushion the blow.

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Why is this happening?

Sadly, this data doesn’t mean that pensioners have suddenly become wealthier – far from it.

Instead, the spike is mainly due to the ongoing freeze on Income Tax thresholds – the amount at which you start paying tax or fall into higher brackets.

At present, most Brits pay Basic Rate Tax on earnings above £12,570.

The Higher Rate band kicks in at £50,271 and the Additional Rate at £125,140.

The Higher Rate is 40% and the Additional Rate is 45%.

Due to decisions from successive Governments, these thresholds will remain at their current levels until at least 2028.

As a result, the proportion of pensioners paying 40% tax (or higher) has soared from one in 14 to one in nine during the four-year period.

A stealth tax rise

While tax freezes may not sound as painful as hikes, we need to consider the corrosive effects of inflation and what is known as the ‘fiscal drag’.

Fiscal drag occurs when rising incomes push people into higher tax brackets, even though the Government hasn’t explicitly increased rates.

As pension pay-outs and wages rise, more and more Brits are creeping into higher brackets.

Elevated risks for pensioners

These findings are particularly bad news for older people who may not have the same capacity to increase their earnings as those still working.

Retirees with a combination of state, workplace and private pensions are especially vulnerable.

Part-time work or rental income can also push older people into higher brackets.

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Three times the threat

However, the problem goes beyond Income Tax, with Webb identifying a “triple whammy” for those paying higher rates.

Once you cross into this band, even by just £1, you also face other knock-on tax increases.

For example, your Personal Savings Allowance drops from £1,000 to £500, meaning that more of your savings interest becomes taxable.

Likewise, your Capital Gains rate rises from 18% to 24%, increasing tax payable on profits from selling investments.

Rate changes per year

So, how much are Brits actually paying?

Tax Year	Basic Rate (20%)	Higher Rate (40%)	Additional Rate (45%)	Total taxpayers
2021/22	6,206,000	449,000	45,000	6,700,000
2022/23	6,564,000	619,000	50,000	7,233,000
2023/24	6,902,000	849,000	54,000	7,805,000
2024/25	7,039,000	977,000	53,000	8,069,000
2025/26	7,039,000	983,000	45,000	8,067,000

Source: FOI Reply to Steve Webb, May 2025

4 ways pensioners can (hopefully) avoid Higher Rate tax

While tax freezes leave many of us little room for manoeuvre, there are practical steps pensioners can take to reduce the impact.

Defer your State Pension

If you don’t need your State Pension straightaway, delaying it could boost your future payments by approximately 5.8% per year.

More importantly, deferring keeps your current taxable income lower, helping you avoid creeping into the Higher Rate threshold.

Note that you’ll need to defer by at least nine weeks.

Manage your withdrawals carefully

If you have a private pension pot, try to avoid taking large lump sums all in one tax year.

Spreading withdrawals over multiple years can help keep your income within the Basic Rate band.

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Use ISAs for tax-free income

Any interest you earn from Cash ISAs or Stocks & Shares ISAs doesn’t count as taxable income.

During the 2025/26 tax year, most UK adults can save up to £20,000 in the form of ISAs.

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Share assets with your partner

If your spouse or partner is in a lower tax bracket, consider transferring income-generating assets into their name.

Doing so could help spread your tax burden.

Of course, there is always a risk if the relationship were to fail.

Another option is to take advantage of the Marriage Allowance.

This lets a lower earner share up to 10% of their tax-free Personal Allowance with their spouse, allowing the higher earner to lower their overall tax bill.

According to experts, the allowance could save you up to £252 per year.

A final word

If you’re struggling with your tax bill, it could be worth seeking help from an accountant or financial adviser.

These professionals can advise you on the most efficient way to reduce your bill to HMRC.