Over-60s could be facing unexpected tax dues from next April
A combination of the Triple Lock guarantee and frozen personal allowance thresholds could see state pension payments triggering income tax bills for retirees from next April. Millions of people over the state pension age already have to pay HMRC but hundreds of thousands more could be passively dragged into taxable income thresholds.
However, it may not be an unavoidable bill, as one money expert revealed how people nearing retirement age and those already receiving state pension could minimise the impact of this tax bill and keep their financial stability.
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.”
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The money expert urged people over the state pension age to check if they are eligible for Pension Credit. This widely underclaimed benefit tops up pension income for those on low earnings and it also provides access to a range of other support even if you’re only eligible for a few pounds a week.
This other support can include help with NHS dental treatment, free TV licences for those over 75, and council tax reductions. The Gov.uk website has a Pension Credit calculator to help people figure out if they qualify.
If you are eligible for Pension Credit but may not receive payments from it, for example if your savings are too high, it may still be worth making your claim in order to get the passported benefits it holds.
For people who are still working, whether they are nearing or over the state pension, could take other steps to help navigate the extra tax costs 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.”
Finally, the expert urged the Government to release “clear guidance on pension taxation and savings”, adding that it would give the clarity and peace of mind that people nearing retirement age need in order to plan their finances.
Chancellor Rachel Reeves assured 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 breaches the personal allowance threshold.
The details of this “workaround” is still being ironed out. However, it may mean that retirees who receive even a little bit of income from private pensions or part-time work on top of the state pension won’t be included in the exemption.
