Retirees are nearly £1,300 better off thanks to the State Pension Triple Lock but frozen tax thresholds mean millions could now be dragged into paying income tax.
Millions of older people are set to face an income tax bill as the State Pension rises to just £22 below the Personal Allowance this year. The full New State Pension has increased to £12,548 a year following a 4.8 per cent rise under the Triple Lock, which guarantees annual increases in line with earnings growth, Consumer Price Index (CPI) inflation rate or 2.5 per cent – whichever is highest.
While the boost means retirees are almost £1,300 better off compared to if the State Pension had only risen with CPI inflation at 3.8 per cent, it also brings many dangerously close to paying income tax. It’s important to be aware that those whose sole source of income is the State Pension will not pay tax.
However, with the Personal Allowance frozen at £12,570 until April 2031, pensioners now need just £22 of additional income before they start paying income tax.
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This is a sharp change from a few years ago. In the 2021/22 tax year, pensioners could earn more than £3,200 on top of their State Pension before crossing the tax threshold.
New analysis by Vanguard shows the impact is already being felt. The number of taxpayers aged 66 and over has jumped from 6.7million in 2021/22 to 8.8million in the last tax year – an increase of nearly 2.1million people.
James Norton, head of retirement and investments at Vanguard, warns the latest State Pension rise is likely to push even more retirees into the tax system, particularly those with small private pensions or savings income.
He explained: “The value of the Triple Lock is clear, with the inflation-busting increase confirmed.
“Our analysis shows that those receiving the full new State Pension are almost £1,300 better off compared to if there was just an inflation link in place.
“But with the Personal Allowance frozen, many pensioners will find they are paying tax for the first time or paying more than expected. A considered approach to retirement income is essential to avoid unnecessary tax.”
With the State Pension now using up almost all of the tax-free allowance, retirees are being urged to carefully manage any additional income.
This could include money from private pensions, savings interest or investments, all of which may now push total income above the tax threshold.
The team at Vanguard say drawing too much from private pensions could trigger avoidable tax bills, while leaving money invested for longer may help reduce tax exposure.
Couples are also being encouraged to plan finances together to make full use of both partners’ allowances, potentially reducing the overall tax burden.
The figures highlight a growing issue for older people, where rising State Pension payments are being offset by frozen tax thresholds – effectively pulling more retirees into paying income tax each year.
