Surge in number of pensioners paying income tax at the highest rates
From whatever political standpoint there is general agreement that Scotland is a wealthy country. But there remains a wealth inequality between the richest and poorest. John Swinney’s Programme for Government 2026 – 2031 made a number of pledges which are intended to tackle poverty and redistribute wealth.
However pensioners across Scotland have been asking why they are being expected to foot a larger part of the bill than the rest of society.
Why are more pensioners paying higher rates of income tax?
A recent freedom of information request submitted by Steve Webb, the former pension minister, newspaper columnist and partner with pension consultancy Lane Clark & Peacock, revealed a surge in the number of pensioners paying income tax at the highest rates.
This includes those in Scotland paying at 42 per cent or 45 per cent (the ‘higher’ and ‘advanced’ rates respectively) in the higher rate tax category, and those paying at 48 per cent (the ‘top’ rate) in the ‘additional rate’ category. These rates apply only to the portion of taxable pension income within each band, rather than to the whole pension.
This comes after a five-year period in which the income tax personal allowance has been frozen at £12,570 and the starting rate of higher rate income tax has been frozen at £50,270 in England and Wales, while the higher rate in Scotland starts at £43,663.
In addition, the starting point for additional (45 per cent) rate tax was first frozen at £150,000 and then cut to £125,140 from 2023/24 onwards.
The result of these freezes, combined with significant inflation-linked increases to state pensions and other pensions, has been not only to bring more pensioners into the tax net, but to increase the numbers paying tax at 40 per cent or 45 per cent.
Many people of working age may have expected that they would be basic rate taxpayers in retirement
— Steve Webb
Taken together, those paying at 40 per cent or 45 per cent has risen from 494,000 in 2021/22 to 1,092,000 in 2026/27. The numbers paying the highest (45 per cent) rate have roughly trebled over that period.
Webb says: “Many people of working age may have expected that they would be basic rate taxpayers in retirement, but few will have expected to find themselves paying 40 per cent or more out of their pensions in tax. But this is the norm now for over a million pensioners, with the number set to rise further.
“Those who are planning their retirement finances will increasingly need to allow for the fact that a significant chunk of the income they had planned to live on will be taxed at 40 per cent or more, and for some that means more pension saving will be needed today to compensate.”
The continued freezing of allowances and thresholds, which has already been announced, until 5th April 2031, will accelerate this trend. The real value of the starting point for tax is beginning to move into much denser parts of the pensioner income distribution.
Pensioner wealth and inequality in Scotland
But with an ageing population in Scotland, who by its nature is more likely to use the National Health Service, is there not a strong argument that wealthier older people should pay more?
In 2025, statistics showed average wealth among Scots remained stable. A typical household in Scotland had £239,500 in total wealth, similar to previous years.
A typical household in the wealthiest 10 per cent of households had £1.3m in total wealth, whereas a typical household in the least wealthy 10 per cent of households had £7,600.
“Wealth inequality is more severe than income inequality: the two per cent of households with the highest incomes had ten per cent of all income, while the wealthiest two per cent of households had 15 per cent of all wealth,” says the Scottish Government’s Wealth in Scotland survey, based on Office for National Statistics’ Wealth and Assets Survey.
“Households that tend to be wealthier than others are higher income households, pensioner couples, and home owners. In contrast, households with below average wealth tend to be low income households, lone-parent and single working-age adult households, and those in rented housing,” it stated.
Within this debate, is the philosophical point about how much those who enjoy wealth should contribute to all of society.
Frozen tax thresholds and rising living costs squeeze retirement income
The Scottish Fiscal Commission recently highlighted the pressures on the Scottish Government to set out in detail its spending plans, including the scale of savings it has made. The global economic outlook has weakened since January. With rising energy prices and food likely to cost more, inflation is likely to be higher than previously forecast. This could further squeeze household incomes and place added pressure on public spending.
Low-income households are likely to continue to be hardest hit, because they spend a greater share of their income on essentials such as food, energy and housing, and have less flexibility to absorb rising costs.
First Minister John Swinney in his Programme for Government spoke a great deal about building community resilience and the need to cut the size of the public sector and improve efficiency, but there was not a single mention of what might be done to alleviate the tax burden on pensioners.
What is likely is more pensioners on the financial cusp will be pulled into paying tax in their retirement.
Lane Clark & Peacock (LCP) are investment experts who publish the latest news and insight son how investors can balance risk, remain diversified and focus on long-term strategic objectives.
FAQs
Why are more pensioners being pushed into higher tax brackets?
When pension income rises but tax thresholds remain frozen, more income becomes taxable or falls into higher tax bands. This is known as fiscal drag. Source: House of Commons Library
What are Scotland’s higher income tax rates for pensioners?
For 2026/27, the higher rate is 42%, the advanced rate is 45% and the top rate is 48%. These apply to pension income within the relevant bands, rather than the whole pension. Source: GOV.UK
How long is the personal allowance frozen?
The standard UK personal allowance remains £12,570 until 5 April 2031. Pension income increases can therefore raise tax bills even when tax rates stay unchanged. Source: House of Commons Library
Are all pensioners in Scotland wealthy?
No. Scottish Government statistics identify pensioner couples among the groups that tend to hold more wealth, but this does not establish that every pensioner has substantial assets or income. Source: Scottish Government
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