Inflation will see 'half a million' more pensioners paying income tax, experts warn

Since the general election, 1.2 million more over-65s are now paying income tax, with the April pension changes and tax threshold freeze adding many more to their number.

In April 2023, the personal income tax threshold will remain frozen at £12,570, but the state pension is expected to rise in line with CPI inflation - which was 9.9% in the year to August - as many occupational pensions are also expected to do. Public sector pensions are likely to rise in like with RPI inflation figure, which was 12.3% in the year to August. Private sector occupational pension holders are lilely to see a smaller increase.

In April 2022, the state pension rose by just 3.1%, yet the fact that income tax thresholds were frozen meant that the number of over-65s paying tax rose by 390,000 between last year and this year, according to HMRC data. With a much larger pension increase expected in April 2023, a much bigger increase in the number of over-65s paying tax is expected. LCP calculations suggest this is likely to be at least half a million more being added to the total.

LCP partner Steve 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. 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”.