Around 12m State Pensioners will be more than £800 a year better off from 6 April but the extra cash could push many into a tax-paying bracket for the first time, experts have warned.
From 6 April the full State Pension climbs 8.5% to £11,541.90 for 2024/25, close to the annual tax personal allowance.
Any income – including retirement income – above the personal allowance of £12,570 is subject to income tax.
In 2010, 4.5m pensioners were liable for tax but the latest HMRC estimates suggest that 8.5m pensioners were liable for tax last year.
The new State Pension rise is likely to increase the numbers of pensioner taxpayers to above 9m, meaning the number will have more than doubled since 2010, according to former Pensions Minister Baroness Ros Altmann.
She said: “Most of those tipped into tax will be poorer pensioners with little more than their state pension to live on. Most of them will be totally unaware of any liability and will probably never have filled in a tax return in their life. They are then at risk of being hit with fines and penalties for not paying a tiny amount of tax that they didn’t even know about.”
She warned that pensioners who are married or in civil partnership, who give part of their personal allowance to their partner by using the marriage allowance will have an even lower personal allowance of just £11,310, rather than £12,570.
She said: “They are already at risk of being liable for small amounts of tax without knowing.”
Dean Butler, managing director for Retail at Standard Life, said: “It’s important pensioners are aware of the potential tax implications, with the personal allowance set to be frozen until 2028. The personal allowance has remained flat in recent years and will gradually be bringing more and more people into the tax system as result – including pensioners with only very low incomes above the State Pension.”
Clare Moffat, pensions expert at Royal London, added that pensioners in DB schemes were also at risk of tax.
She said: “Those in defined benefit schemes, where a fixed amount of pension is paid every month, like public sector schemes, will often increase in April too. This, alongside the state pension rise, will push more income into taxable territory.”
Baroness Altman called for the personal tax threshold to be increased in line with inflation to help pensioners.
She said: “An increase in the personal tax threshold, which was frozen in 2021/22 and is not due to rise again till after 2025/26, would alleviate some of the pressure, especially as inflation has been so high in the past couple of years.”
She also said that pensioners must be warned that they need to check their tax position.
Financial Planning Today Analysis: Giving with one hand and taking with another might be an accurate description of the latest State Pension increase. The increase is, of course, welcome and the percentage rise thanks to the Triple Lock means the State Pensions are becoming more valuable. The latest rise is also likely to be far in excess of the increases made by many private pension schemes. The issue for pensioners, however, is that many more are being dragged back into the income tax net, facing having to do a tax return and losing more of their income. With personal tax thresholds frozen until April 2028 (unless the Chancellor alters this), many more State Pensioner will see more of their income chipped away by tax each year. The issue is one a Chancellor will need to address in due course to ensure that the Triple Lock is not undermined by an increasing tax take from some of the country’s poorest pensioners.
