Payment rates for the state pension increase each year
State pensioners have been warned they could soon get a new tax bill. As state pension rates increase, more pensioners are moving into paying income tax. You can earn up to £12,570 a year without paying income tax in line with the personal allowance, which is frozen at its current level until April 2028.
The full new state pension is currently £230.25 a week, or £11,973 a year, barely £600 away from crossing the threshold to land an income tax bill. Derence Lee, chief finance officer at savings provider Shepherds Friendly, warned that rising payments mean more state pensioners are moving into the tax-paying bracket.
State pension payments increase each April in line with the triple lock, with payments set to go up 4.8 per cent next year. The triple lock ensures rates go up in line with the highest of 2.5 percent, the rise in average earnings or inflation.
Mr Lee said: “Pensioners should begin to take into account that they may soon need to pay income tax on their pensions should no changes be made to current status-quo. Whilst the triple lock has been helpful in ensuring retirees’ incomes keep up with the cost of living, taxing pensioners could have significant financial implications, particularly for those who rely heavily on their pensions to cover essential living costs and make ends meet.”
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Mr Lee said it’s worth planning ahead as you may have to fill in some HMRC forms if you move into paying income tax. He explained: “Many pensioners may not need to fill in a tax return, because HMRC usually collects tax automatically through the PAYE system or sends a Simple Assessment bill showing the amount due.
“However, if they have other income that isn’t taxed at source, such as a private pension, rental income, or freelance earnings, they may need to complete a Self Assessment form or contact HMRC to adjust their tax code.”
He encouraged those with concerns to call up HMRC on their tax helpline, on 0300 200 3300. The tax expert also said that if you are moving into a higher tax bracket as your income increases, it’s good to take a look at how this could affect your overall finances.
He said: “It can be helpful to review all sources of income, including state and private pensions, part-time work, investments and savings, to ensure HMRC has accurate and up to date information.”
Another piece of advice from Mr Lee is to check if you are eligible for any benefits, such as Pension Credit. This state pension age benefit tops up your income up to £227.10 a week for single claimants or up to £346.60 a week for couples. You can get additional amounts on top of this depending on your situation, such as if you care for another adult.
State pensioners may also want to check if they are eligible for the Winter Fuel Payment, as the qualifying rules for the payment have changed recently. Most people of state pension age qualify for the payment, worth between £100 and £300. However, if you earn over £35,000 a year, you will have to pay back the amount through HMRC.