One assumption in pension planning for an owner-manager is to contribute while the marginal rate is 40% and draw while it is 20%. Figures published on 1 September 2026 show that assumption no longer holds for a large group of people.
More than 1m pensioners now paying 40% or more in tax (Money Marketing, 1 September 2026)
A Freedom of Information request by LCP partner Steve Webb, reported by Money Marketing on 1 September 2026, shows that the number of pensioners paying income tax at 40% or 45% has risen from 494,000 in 2021/22 to 1.092 million in 2026/27. The number paying the 45% additional rate has roughly trebled over the same period.
The rates did not change, and the thresholds stayed still while pension income rose. GOV.UK’s guidance for the 2026 to 2027 tax year sets the Personal Allowance at £12,570, the basic rate at 20% up to £50,270, the higher rate at 40% from £50,271 to £125,140, and the additional rate at 45% above that (GOV.UK, Income Tax rates and Personal Allowances). The Personal Allowance is withdrawn at £1 for every £2 of income above £100,000, reaching zero at £125,140.
HMRC’s policy paper Maintaining Income Tax and equivalent National Insurance contributions thresholds until 5 April 2031, published on 26 November 2025, holds the Personal Allowance at £12,570 and the basic rate limit at £37,700 for the 2028/29, 2029/30 and 2030/31 tax years, keeping the higher rate threshold at £50,270 until 5 April 2031.
Webb said that paying 40% or more in tax on pension income “is the norm now for over a million pensioners, with the number set to rise further.”
GOV.UK gives the full rate of the new State Pension as £241.30 a week. Over 52 weeks that is £12,547.60, against a Personal Allowance of £12,570. A client on the full new State Pension has £22 of allowance left.
Everything else is taxed from the first pound. This example uses made-up figures. A client sold a business three years ago. State pension £12,547.60. Drawdown of £42,000 a year, set at the level the pot would sustain. Non-savings income of £54,547.60.
Made-up figures, against the 2026/27 bands
Against the 2026/27 bands, the Personal Allowance covers £12,570, the basic rate limit of £37,700 is taxed at 20% for £7,540, and the remaining £4,277.60 falls into the 40% band, costing £1,711.04. The client is a higher rate taxpayer.
The same client holds £8,000 of interest from the sale proceeds. As a higher rate taxpayer their Personal Savings Allowance is £500; GOV.UK sets it at £1,000 for basic rate, £500 for higher rate and nil for additional rate. So £7,500 is taxable at 40%, costing £3,000. Had their pension income been £4,278 lower, the same interest would have been taxed at 20% with £1,000 of it covered, a difference of about £1,600 on the interest alone.
LCP, 1 September 2026: 1.092 million pensioners pay income tax at 40% or 45% in 2026/27, up from 494,000 in 2021/22.
HMRC’s policy paper Changes to tax rates for property, savings and dividend income, also published on 26 November 2025, increases the rates of income tax on savings income by 2 percentage points across all bands from April 2027. On the example client’s £7,500 of taxable interest, the charge moves from £3,000 to £3,150.
The same paper creates separate rates for property income from 2027/28, 22% basic, 42% higher and 47% additional, which affects a retired owner with a rental property alongside a pension.
It increases the ordinary and upper rates on dividend income by 2 percentage points from April 2026, with the additional rate unchanged. It also provides that reliefs and allowances deductible at steps 2 and 3 of the income tax calculation are applied to property, savings and dividend income only after they have been applied to other sources of income.
The tax return is the one document on which a retired client’s state pension, drawdown, savings interest, rental profit and dividends appear together. The accountant produces it after the tax year has closed. The drawdown level, the figure that decided which band everything else fell into, was set before the year began, by a financial planner who could see the pension, or by the client alone.
The FCA’s Financial Lives 2024 survey found that 8.6% of UK adults had taken regulated financial advice in the previous twelve months, and 13% of the self-employed. The accountant sees the retired client’s whole income once a year, with the complete figures.
Drawing taxable income flexibly from a defined contribution pension triggers the money purchase annual allowance. GOV.UK’s pension schemes rates page, updated 6 April 2026, sets the standard annual allowance at £60,000 for 2026 to 2027 and the money purchase annual allowance at £10,000. An owner who starts drawdown at 58 and takes on consultancy work at 61 has cut their pension headroom by £50,000 a year. The accountant sees the consultancy income arrive.
The tax arithmetic is accountancy work: computing the marginal position, showing what a given level of income costs across the bands, explaining how the Personal Savings Allowance interacts with the higher rate threshold, and pointing out the money purchase annual allowance consequence of a drawdown decision already taken. None of it requires FCA authorisation.
The recommendation is regulated advice: how much to draw, in what order to draw from which assets, or where the money should sit. That requires authorisation under the Financial Services and Markets Act 2000 and sits with the Equity & General financial planner. In a partnership, the accountant supplies the projected non-pension income before the drawdown is set, and the financial planner decides against the full total. The figures on who takes advice are on the advice gap.
How far the trend runs. LCP’s figures count people at 40% and 45% today. The freeze to 5 April 2031 makes further increases likely, but the size depends on earnings and inflation over four years that have not happened.
The interaction with pensions in the estate. For deaths on or after 6 April 2027, most unused pension funds count in the estate for inheritance tax (Finance Act 2026). A client who draws less to stay under the higher rate threshold leaves more in a pension that will form part of the estate, and a client who draws more creates the income tax problem above. The two pressures point in opposite directions, and the answer depends on the client, so it sits with the financial planner. The 2027 change is set out in when the pension joins the estate, and the rise in the normal minimum pension age in the closing window.
The drawdown level, the order assets are drawn in and the wrapper the money sits in are regulated decisions and belong to the Equity & General financial planner. The arithmetic and the timing sit with the accountant. The tax return is where the state pension, the drawdown, the savings interest, the rental profit and the dividends first appear on one page, and it is produced months after the tax year closed. The accountant sees the complete income picture of a retired client, but only after the year it describes has ended.
They are not near the higher rate on the state pension alone, but they have almost no allowance left for anything else. GOV.UK gives the full rate of the new State Pension as £241.30 a week, which is £12,547.60 over 52 weeks, against a Personal Allowance of £12,570. That leaves £22 of unused allowance. Every pound of drawdown, annuity income, rental profit, savings interest above the Personal Savings Allowance or dividend beyond the dividend allowance is taxed from the first pound.
Taking taxable income flexibly from a defined contribution pension triggers the money purchase annual allowance. GOV.UK’s pension schemes rates page, updated 6 April 2026, sets the standard annual allowance at £60,000 for 2026 to 2027 and the money purchase annual allowance at £10,000. An owner who draws flexibly at 58, then takes on consultancy work at 60 and wants to put profits back into a pension, finds the headroom cut to £10,000 a year. The tax-free lump sum on its own does not trigger it. The accountant sees the consultancy income and the financial planner sees the drawdown, so the two need to be talking.
Pull the returns where a client is drawing both state pension and private pension income, then sort by total income against the £50,270 higher rate threshold. The clients between £45,000 and £60,000 are the ones a change in drawdown moves across a 20-point rate step. Add anyone whose income sits between £100,000 and £125,140, where the Personal Allowance taper produces a 60% effective marginal rate. Both lists are made up of clients whose position can still be changed for the current year.
In sequence. The accountant supplies the projected non-pension income for the coming year, rental profit, savings interest, dividends and any consultancy, before the drawdown level is set. The Equity & General financial planner then sets the drawdown against the full total. The recommendation stays with the financial planner. The financial planner makes it with the whole income picture.
Equity & General holds the FCA authorisation. There is no charge to your firm, and a named partnership director works with you from the first introduction.