Warning to 500,000 retired people over new tax payments

Notes and pound coins.

Over half a million pensioners could pay more tax next year - Credit: PA

More than half a million of those retired could be forced to pay income tax next year.

It comes after the number of over-65s paying tax rose by 390,000 between the 2021 and 2022 financial year after just a 3.1pc rise in the state pension in April 2022, with a larger rise expected in 2023.

Next year's rise is expected to drag more than 500,000 in to the "tax net" according to former Liberal Democrat pensions minister Sir Steve Webb.

Mr Webb, who is now a partner at pensions specialists LCP (Lane Clark & Peacock), said the rise in paying pensioners would be caused by a combination of frozen income tax thresholds, combined with pension increases next year.

Next year, the state pension is expected to rise in line with CPI (Consumer Prices Index) inflation in the year to September 2023. The August inflation figure was 9.9pc.

LCP said that many occupational pensions will be increased because of inflation, although the exact rules may vary.

Mr Webb said: “Freezing tax thresholds is a stealthy way of raising tax at the best of times, but at a time of soaring inflation, freezing thresholds has a profound effect.

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“During this parliament we have already seen over a million extra pensioners dragged into the tax net, and next April’s increase is likely to add at least half a million more.

“If the chancellor is looking for ways to cut taxes and ease cost of living pressures on those on modest incomes, he could do worse than review the long-term freeze of income tax allowances.”

A treasury spokesperson said: “Over the last decade we have increased the personal allowance people have before they pay any income tax from £6,475 in 2010 to £12,570 today.

“This has lifted millions of the poorest out of paying any income tax at all, and meant a real-terms tax cut of £750 for 27 million people.

“The vast majority of taxpayers will still pay the basic rate and the UK still has the highest personal allowance in the G20.”