State pension is expected to go above the personal allowance threshold next year (Image: GETTY)
A combination of the Triple Lock guarantee and frozen personal allowance thresholds could result in state pension payments triggering income tax bills for pensioners from next April. Millions of people over state pension age already face HMRC payments, but hundreds of thousands more could be passively pulled into taxable income thresholds.
However, this bill may not be unavoidable, as one financial expert has revealed how those approaching retirement age and existing state pension recipients could reduce the impact of this tax liability.
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.
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“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.”
The financial expert encouraged people above state pension age to verify their eligibility for Pension Credit. This frequently unclaimed benefit supplements pension income for those with modest earnings and additionally grants access to various forms of support, even if you’re only entitled to a small weekly amount.
This additional support can encompass assistance with NHS dental care, complimentary TV licences for those aged over 75 and council tax discounts. The Gov.uk website features a Pension Credit calculator to help people determine their eligibility.
If you qualify for Pension Credit but may not receive direct payments from it, perhaps if your savings exceed the threshold, it could still be worthwhile submitting your claim to access the passported benefits it offers.
For people who are still in employment, whether they are approaching or beyond state pension age, alternative measures could be taken to help manage the additional tax burdens they might encounter.
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 called upon the Government to issue “clear guidance on pension taxation and savings”, noting that it would provide the clarity and reassurance that people nearing retirement age require to properly plan their finances. Chancellor Rachel Reeves confirmed last year that pensioners whose only income is the basic or new state pension will not be liable to pay tax on it even if it exceeds the personal allowance threshold.
The specifics of this “workaround” are still being finalised. Nevertheless, it could mean that retirees who receive even a small amount of income from private pensions or part-time employment in addition to the state pension may not be covered by the exemption.
