Warning nearly half a million Brits could pay more tax in retirement

15 February 2023 , 14:53

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If you get the New Full state pension, then from April you will receive £10,600 a year (Image: Getty Images/iStockphoto)

When the state pension rises by 10.1% in April, nearly half a million more pensioners could have to pay tax on their retirement funds.

Nearly 13million people will receive the uplift in April which will help some of the most vulnerable with the rising cost of living.

However, the rise may also mean more people will have to pay taxes on their income.

If someone is claiming the full new state pension, then they will receive £815.40 every four weeks which will give them an annual income of £10,600.

However, this only leaves them with just £1,969.80 left of their personal allowance.

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If you don't have any additional income, such as earnings, savings interest or other pensions then you won't be affected.

However, if you do then you are at risk of having this extra income being taxed.

The personal allowance is currently frozen at £12,570 for the 2023/24 tax year.

The former Liberal Democrats pensions minister Sir Steve Webb, who is now a pensions specialist at LCP (Lane Clark & Peacock) has previously warned that around 500,000 pensioners could be dragged into the tax net.

After looking at official HMRC figures last year, LCP found that between the 2021-22 and 2022-23 tax years, around 390,000 more over 65 started paying tax and this was due to income tax thresholds being frozen.

During this time, however, the state pension only increased by a measly 3.1%,

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

In November last year, Sir Steve said that freezing tax thresholds was a "stealthy way" of raising taxes at the best of times but at a time of soaring inflation, freezing thresholds has a "profound effect".

He criticised the Government and accused them of dragging over a million pensioners into the tax next during this parliament.

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

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When responding to the findings at the time, the Treasury said it had "increased the personal allowance people have before they pay any income tax from £6,475 in 2010 to £12,570.

A Treasury spokesperson added: “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."

How much will the state pension be from April 2023?

On 17 November the Treasury confirmed that the triple lock will remain in place for 2023 and with September's Consumer Price Index (CPI) being at 10.1%, this would be how much it would rise by.

For the new full state pension, this will increase by: