MORE than half a million retired people could end up paying income tax next year due to a rise in state pensions, a former pensions minister has warned.

Sir Steve Webb, who is now a partner at pensions specialists LCP (Lane Clark & Peacock), said frozen income tax thresholds, combined with pension increases next year, may potentially pull at least another half a million pensioners into the income tax net.

LCP said that in April 2022 the state pension rose by only 3.1 per cent, yet as income tax thresholds were frozen the number of over-65s paying tax rose by 390,000 between the financial years 2021/22 and 2022/23.

With a much larger pension increase expected in April 2023, a bigger jump in the number of over-65s paying tax is expected.

LCP calculations suggest this is likely to see at least half a million more being added to the total.

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 9.9 per cent.

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

Sir Steve 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.

“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 spokesman 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.”