Over 65s now extra prone to pay revenue tax than every other age bracket

Two-thirds of pensioners now pay income tax and, for the first time, those aged 65 and over are likely to pay than collectively those aged 16 to 64.

People aged 65 and over have historically benefited from a higher personal allowance than younger people.

The income tax personal allowance increased 61 per cent during the 2010s, meaning the proportion of adults subject to the tax fell.

However, the Institute of Fiscal Studies says this has been ‘eclipsed by the rise during the 2020s’, from 58 per cent to a projected 66 per cent.

The proportion of pensioners paying income tax is forecast to be higher than all age brackets 

This has been driven by a larger proportion of pensioners having to pay income tax.

While the triple lock ensures the state pension rises in line with inflation, earnings or 2.5 per cent, retaining the freeze on the personal allowance means that a pensioner who receives the £11,500 a year full state pension and some private pension income is liable to pay income tax.

During the 2010s, pensioners saw little real-terms increase in their personal allowance, and are seeing a reduction now, according to the IFS.

Alongside pensioners’ incomes rising faster than the working-age population’s, 65 per cent of those aged 65 and over are paying income tax. 

In 2010-11, 48 per cent of pensioners paid tax on their income.

In the 2023-24 financial year, they were, for the first time, more likely to pay income tax than those aged 16 to 64, the IFS says.

The Conservative Party has pledged to introduce the triple lock plus, which uprates the tax-free personal allowance for pensioners in line with the highest of inflation, earnings or 2.5 per cent.

It claims that the policy will mean the average pensioner is forecast to see an increase in the state pension of £428 next year and £1,577 by the end of the parliament.

> What the Conservative manifesto means for tax and pensions

Frozen tax thresholds also mean that since 2010, income tax has grown from 9.4 per cent of national income to a projected 10.9 per cent in 2024-25, and 11.3 per cent by 2028-9.

The IFS says the rise in tax revenue is driven by policy changes – frozen tax thresholds, an increase in the rate of corporation tax and a tax on the windfall profits of oil and gas companies.

Economic changes, especially earnings growth, have also pushed tax revenues higher.

The IFS says that the shift away from the Retail Prices Index (RPI) to Consumer Prices Index (CPI) to measure inflation and uprate tax rates and thresholds has had the biggest long-run impact on tax revenue.

‘CPI inflation tends to be lower than RPI inflation, so tax thresholds now increase by less each year than if they were uprated in line with RPI. 

‘The difference in tax thresholds – and the resulting increase in revenue – gets bigger every year, so over the long term this change dwarfs everything else.’