The annual tax bill for the UK’s 7.1 million retired households was £52.7bn from direct and indirect taxes for 2015/16, according to the insurer’s analysis of Office for National Statistics data.

Their tax bill rose an average £400 in the 12 months to April 2016 compared to a year earlier. However, income from state pension, private pensions, benefits and other earnings increased by £1,200 during that period to more than £25,000. The proportion of retired households’ income in tax was 29.6%.

The average household paid £1,970 in income tax in 2015/16, compared to £1,700 in 2014/15.

Indirect taxes such as VAT, insurance premium tax and vehicle excise duty cost an average of £4,360 during the period. The majority of the £400 increase on the previous year came from direct taxation (£300).

‘We have seen income expectations for new pensioners rise in recent years which, for many will mean that they continue to face tax bills well into retirement,’ said Stan Russell, a retirement income expert at Prudential. ‘People planning to give up work should make sure they don’t underestimate the impact that tax will have on their income in retirement.’

The average working household pays a tax rate of 34%.

There are an estimated 12.5m pensioners in the UK in 2014, according to ONS figures, with around 38% living on state pensions. At the moment, 5.9m over 65s pay income tax and would be an obvious target for removal of the benefit. HMRC does not have figures on what percentage of pensioner taxpayers pay higher rate tax. HMRC cannot provide a breakdown based on age.

There are currently 1.9 million claimants of pension credit (2.2m including partners), but nearly two in five (38%) of pensioners do not claim the credit they are entitled to. Average pension credit is £42 per week. 

Stan Russell, a retirement income expert at Prudential, said: ‘No longer working doesn’t mean you’ll no longer be paying taxes, and many retired people will still need to consider income tax bills as well as all the other indirect taxation on expenditure that they will continue to face when they give up work.

‘We have seen income expectations for new pensioners rise in recent years which, for many will mean that they continue to face tax bills well into retirement. People planning to give up work should make sure they don’t underestimate the impact that tax will have on their income in retirement.

‘Saving as much as possible as early as possible during their working lives should help people to plan ahead with more confidence. Creating a long-term plan to set a target income level, and better understand tax implications, can be achieved through a consultation with a professional financial adviser, or with the help of some of the free independent guidance available through organisations such as the Government’s Pension Wise service or The Pensions Advisory Service.’