Income tax thresholds have been frozen for six years, meaning more and more pensioners on low incomes are likely to have to pay tax on their income.
While the full state pension is under the personal allowance, it is a form of taxable income.
The sum rises annually via the triple lock, but with tax allowance not increasing until 2028, pensioners could near or head further into the 20 per cent basic rate tax band.
Alice Guy, head of pension and savings interactive investor, explained: “Frozen tax thresholds mean that more pensioners on low incomes are paying tax as their income rises with inflation but the tax thresholds remain the same.”
The threshold for paying income tax is currently £12,570
The threshold for paying income tax is currently £12,570 and any taxable income above that level will be taxed at 20 per cent, until the income goes into a higher tax band.
Ms Guy explained: “The threshold for paying income tax is expected to stay at the same level until 2028 meaning pensioners pay tax on more and more of their income over time.
“Freezing tax thresholds is the ultimate stealth tax as not many people take much notice of tax thresholds.
“In a time of high inflation, it’s an especially effective policy and will have a big impact on people’s spending power over time.
The state pension forms the bedrock of retirement for many people, with one in five retirees relying on the payment as their only source of income.
The full new state pension is currently £203.85 per week, or around £10,600 a year.
Meanwhile, the full basic state pension is currently £156.20 per week or around £8,122.
Linda Cobley, 72, is calling on the Government to cancel the six-year freeze to the personal allowance.
Recalling the discovery, she said: “I thought, ‘That can’t be right’. But then, when we looked into it, we realised the Government are pumping up themselves by saying we’re giving the pensioners a 10.1 per cent pay rise – but they are freezing their tax allowance!”
A Treasury spokesperson said: “Our older population have the right to security and dignity in retirement which is why this year we provided the biggest ever cash increase to the state pension, a 10.1 per cent rise, which comes on top of extra direct cash payments worth up to £1,350 each to support with cost of living challenges and protection from rises in energy bills.
“We have taken three million people out of paying tax altogether since 2010 through raising personal thresholds, and the Chancellor has said he wants to lower the tax burden further but sound money must come first.”