500,000 extra pensioners to be ‘dragged into tax net’ from next year

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State pensioners are banking on a bumper increase to their sum from April of next year. However, this combined with another year of frozen income tax thresholds could create tax chaos for many.

It is thought at least another half a million people aged 65 and over will be pulled into the income tax net for the first time.

The calculations, undertaken by pension specialists LCP, illustrate the impacts of rising inflation alongside frozen thresholds.

In April 2023, the personal income tax threshold is to remain frozen at £12,570, but there are a number of changes due for pensioners.

Firstly, the state pension is expected to rise in line with CPI inflation this year, as the triple lock makes its return.

Inflation dropped slightly in the year to August 2022, but remains high at 9.9 percent. It is the September figure which will be used to determine April 2023’s increase.

Due to inflation, many occupational pensions are set to be increased, although the specific rules are likely to vary.

For example, public sector pensioners should see a rise in line with RPI inflation based on the figures from the year to September 2023.

The figure is likely to change, but in the year to August, the increase was 12.3 percent.

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Those in a private sector occupational pension should see an increase which is dependent on the rules of their scheme.

LCP states the majority should get some form of inflationary increase, albeit with a likely cap of 2.5 percent, or five percent for example.

In April 2022, the state pension rose by 3.1 percent due to the temporary implementation of a double lock.

However, income tax thresholds were frozen, meaning the number of over 65s paying tax rose by 390,000 between last year and this year. 

As the state pension increase is expected to be much larger due to inflation, so too is the amount of over 65s paying tax set to rise.

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

The firm states this will represent over one and a half million extra over 65s being brought into tax since the General Election. 

Sir Steve Webb, former pensions minister and LCP partner, 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.”

An HM Treasury spokesperson told Express.co.uk: “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.”

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