Why Pensioners Aren't Giving Up Work (or Paying Much Tax)
In a surprising twist, the British labor market is witnessing a peculiar trend: as more young people opt-out of the workforce, pensioners are increasingly staying in it. This phenomenon is particularly intriguing given the traditional retirement age and the state pension age in the UK. According to HM Revenue & Customs, 2.12 million people aged 66 and older were still working in the 2024-25 tax year, despite being past the state pension age. This number is a stark contrast to the rising number of young adults, particularly those aged 16 to 24, who are not in education, employment, or training (Neets).
The number of Neets hit an 11-year high of 987,000 early last year, with long-term mental health problems cited as one of the reasons for this trend. In contrast, the number of workers over the state pension age (66 at present, rising to 67 by 2028) remained stable at 1.56 million in 2024-25, while the number of self-employed pensioners increased by 8% from five years ago, reaching 562,000. Moreover, there are now more people over 70 paying income tax than under-30s, with 5.45 million over-70s contributing to the tax pot compared to 5.23 million under-30s.
Danielle Barbereau, a 67-year-old self-employed divorce coach, exemplifies this trend. She loves her work and has no desire to retire, despite being mortgage-free and having her own private pensions. Her decision to keep working is driven by a passion for her career, not necessity. Barbereau's story highlights the growing trend of pensioners choosing to remain in the workforce, often due to the desire to maintain a sense of purpose and financial independence.
However, this trend has implications for the tax system. The anomaly in the tax system means that pensioners stop paying national insurance once they reach the state pension age, while still being liable for income tax. This creates a significant financial advantage for pensioners, as demonstrated by the example of a 67-year-old earning £30,000, who pays a marginal tax rate of 20%, compared to a graduate in their late twenties earning the same amount, who pays a marginal tax rate of 37%.
The national insurance exemption for pensioners costs the Treasury around £1.1 billion annually, according to former pensions minister Steve Webb. This has sparked debates about the fairness of the tax system, with some arguing that the exemption should be removed to ensure a more equitable distribution of tax burdens. However, others, like Andrea Barry from the Centre for Ageing Better, caution against hastily ending the exemption without a comprehensive understanding of its impact.
The issue of pensioners working longer raises questions about the reasons behind this trend. Some, like Dennis Reed from Silver Voices, suggest that the state pension is insufficient to meet everyday needs, forcing more people to work. Others, like Toby Whelton from the Intergenerational Foundation, point to the unfairness of the tax system, which contributes to a sense of despair and hopelessness among young workers. The growing pensioner workforce may offer financial benefits to individuals like Barbereau, but it also highlights the need for a fairer tax system that addresses the concerns of all generations.
