Understanding the gender tax gap

Female pensioners face equivalent of 7p rise in income tax by 2028, while working women face equivalent of 6p rise due to frozen tax thresholds.

New calculations from interactive investor show that women and pensioners are affected more by fiscal drag than working men on average. Working women and single female pensioners have significantly lower income than men on average, meaning they are more affected by the personal allowance being frozen at £12,570 until 2028.

Single female pensioners will see their tax bill rise by the equivalent of a 7p rise in income tax by 2028 on average due to frozen tax thresholds, assuming their pension income keeps pace with inflation, whereas working women on an average wage will face the equivalent of a 6p rise in income tax by 2028.

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In contrast, single male pensioners will be see their tax bill rise by the equivalent of a 4p rise in income tax by 2028 on average, assuming their pension income keeps pace with inflation, whereas working men on an average wage will face the equivalent of a 3p rise in income tax by 2028.

Assumptions and sources: average salary based on ONS wages data, Pensioners’ Incomes Series. Inflation based on BOE forecast and ONS CPI figures. Calculations compare tax charged if tax thresholds rose with inflation versus if tax thresholds stay the same until 2027/28. Calculations compare tax charged if thresholds rose with inflation and income tax rates increased from 20% to 23%, 24%, 26%, 27%.

Alice Guy,Head of Pensions and Savings at interactive investor says, “Women and poorer pensioners are facing an enormous tax rise as frozen tax thresholds mean they get to keep less of their income over time. Fiscal drag disproportionately affects low earners because a larger proportion of their income is currently tax-free but will become taxable as their income rises with inflation.

“Someone earning £23,348 paid tax on 43% of their income last year, but they will pay tax on a much more painful 56% of their income by 2027-28, assuming their income rises with inflation. In contrast, someone earning £32,396 paid tax on 61% of their income last year and will pay tax on 68% of their income by 2027-28, a much smaller increase than the lower earner.

“Fiscal drag has a big impact on women who earn significantly less than man on average as they often work part-time to fit around caring responsibilities. The long-term impact of caring for loved ones means women are often poorer than men in retirement, already having an average of 35% less in their private pension by the time they reach age 55.

"By 2028, single female pensioners will be paying the equivalent of a 7p rise in income tax as frozen thresholds mean that more of their income is dragged into the tax net. Working women are also facing the equivalent of a 6p rise in income tax by 2028 as tax is charged on more and more of their income.

“Freezing tax thresholds will have a huge impact on poorer pensioners, making it even harder to afford to pay the bills as food and energy costs rise. The average single female pensioner will see their tax bill rise by 73% between 2023 and 2028, as frozen threshold tax thresholds catch more of their income in the tax net.

“Poorer pensioners are often already paying the price for years spent caring for family or struggling with health problems, but fiscal drag and a higher tax bill means it will be even harder to pay the bills.

“Like boiling a frog slowly, freezing tax thresholds is less noticeable than raising tax rates, although it often costs the same over time. It has a cruel impact on poorer workers and pensioners, who may not realise why they feel gradually poorer over time.”