Around 8.5 million people over the state pension age are already paying tax
A combination of the Triple Lock guarantee and frozen personal allowance thresholds could see state pension payments triggering income tax bills for pensioners from next April. Millions of people already beyond state pension age are facing HMRC payments, with hundreds of thousands more potentially being dragged into taxable income thresholds.
However, this bill may not be completely unavoidable, as one financial expert has outlined how those nearing retirement age and current state pension recipients could prepare to manage the tax bills.
Derence Lee, Chief Finance Officer at Shepherds Friendly, said: “With the full new State Pension rising to £11,973 in April, and personal allowance now frozen at £12,570 until 2031, more retirees are edging dangerously close to paying income tax on their State Pension.
“The triple lock has played a vital role in helping pensioners keep pace with the high inflation seen in recent years. However, if the tax-free allowance remains frozen, some of the recent State Pension increases could effectively be taken back through income tax.
“For pensioners who rely mainly on their State Pension to cover everyday essentials, even a small tax bill could make a noticeable difference to their finances. By preparing today, pensioners give themselves the best chance to ensure their income keeps pace with costs and maintain a sense of financial stability.”
The financial expert urged people over state pension age to check whether they qualify for Pension Credit. This often overlooked benefit tops up pension income for those with lower earnings and also unlocks access to a range of additional support, even if you’re only entitled to a modest weekly sum.
This extra support can include help with NHS dental treatment, free TV licences for those aged over 75 and reductions on council tax. The Gov.uk website provides a Pension Credit calculator to assist people in establishing their eligibility.
If you’re eligible for Pension Credit but might not receive direct payments from it, possibly if your savings surpass the limit, it may still be beneficial to lodge your claim to unlock the passported benefits it provides.
For people who continue to work, whether they are nearing or have passed state pension age, different steps could be taken to help manage the extra tax obligations they may face.
Derence said: “Those still working part-time may wish to consider additional private pension contributions, while anyone approaching retirement should consider reviewing how ISAs, workplace pensions and diversified investments can help build a more resilient income stream.”
The expert also urged the Government to provide “clear guidance on pension taxation and savings”, highlighting that this would offer the certainty and reassurance that those nearing retirement need to adequately plan their finances.
Chancellor Rachel Reeves confirmed last year that pensioners whose sole income is the basic or new state pension will not be required to pay tax on it, even if it surpasses the personal allowance threshold.
The precise details of this “workaround” are yet to be finalised. Despite this, it could mean that retirees who receive even a modest amount of income from private pensions or part-time work alongside the state pension may not be covered by the exemption.
