The personal finance expert has issued a warning that some people with a state pension may be taxed on their income. However, he has said there are ways people can avoid it
Martin Lewis has tackled worries that people might encounter tax consequences on their state pension next year. The money-saving expert revealed that numerous individuals had reached out to him, voicing concerns about potentially losing part of their pensions to higher taxation.
He outlined that the problem arises from the personal tax allowance threshold, which was locked in 2021 by the Conservatives at £12,570. Chancellor Rachel Reeves has previously signalled that this freeze will continue until 2028. Nevertheless, considering the current debt crisis gripping the country, some experts have proposed it might be prolonged even further.
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Mr Lewis explained that the ‘fiscal drag’ resulting from the freeze means anyone earning above £12,570 starts paying income tax at that threshold.
The triple lock system, which guarantees pensions rise annually by the greatest of 2.5%, the CPI inflation rate, or wage inflation, could result in people beginning to pay income tax next year even if their sole income is the state pension.
He declared: “I’m getting quite a few people getting in touch concerned “The State Pension will start to be taxed” on the back of newspaper articles. I thought it worth making a few simple points to clear up possible confusions.”
Martin Lewis emphasised the following points: He added: “So overall, the fact that ‘the State Pension alone may be taxable for some’, is primarily due to the freezing of the personal allowance and the significant annual increases in the State Pension.
“One way politicians could prevent this would be to raise the personal allowance (for everyone or just for state pensioners). However, it’s worth noting that another solution could be to abolish the triple lock, so the State Pension doesn’t increase as much!
“I’m not trying to make any political point here. Just attempting to explain how it works as I’ve had quite a lot of questions.”
A campaign urging Rachel Reeves to hike the lowest personal tax allowance threshold has seen a groundswell of support following a parliamentary debate, reports Lancs Live. In a huge wave of frustration people have been signing up to a massive petition on the parliament website on the issue.
The petition concluded last week with 281,792 signatures, making it the second-largest petition on the platform – only surpassed by one demanding a general election, which has amassed over 3 million signatures.
At present, people start paying tax after earning £12,570 – a threshold that has remained unchanged since 2021, resulting in millions of the UK’s lowest earners being pushed into the tax-paying bracket.
The petition has called on Chancellor Rachel Reeves to raise the income tax threshold to £20,000, highlighting the unfairness of ‘fiscal drag’ impacting the lowest earners.
The campaigners are pressing the Treasury to: “Raise the income tax personal allowance from £12570 to £20000. We think this would help low earners to get off benefits and allow pensioners a decent income.”
They argue: “We think it is abhorrent to tax pensioners on their state pension when it is over the personal allowance. We also think raising the personal allowance would lift many low earners out of benefits and inject more cash into the economy creating growth.”