Over 12million state pensioners facing ‘retirement tax’ as pay rise hits in days

OVER 12million state pensioners face paying a “retirement tax” as a pay rise hits in days.

Millions should brace for paying tax on their incomes due to a rising state pension and frozen income tax thresholds.

The state pension rises every year based on the “triple lock” – whatever is highest out of inflation, 2.5% or wages.

From Sunday (April 6), it is rising by 4.1%, based on wages for the three-month period from May to July last year.

It means someone on a full new state pension will see their yearly income rise from around £11,502 to £11,973 – a hike of £471.

The full new basic state pension will rise from £8,814 to around £9,175.

However, with income tax thresholds frozen until 2028, more and more pensioners could be dragged into paying tax on their income.

The personal allowance will stay at £12,570, meaning the full new state pension amount will likely breach the threshold before 2028.

Clare Moffat, pensions expert at Royal London, said: “Around 12million pensioners will receive more in their state pension from this weekend (6 April), bringing them perilously close to the amount that can be received without incurring tax liability.

“If the ‘triple lock’ continues to rise, the state pension could soon exceed the personal allowance and be taxable.”

Retirees earning income from other areas outside the state pension will be hit with higher tax bills, and earlier too.

This is because you are taxed on most job-related income, income from renting out a property and private or workplace pensions.

So, many of those who get income from other sources outside of the state pension could be dragged into paying income tax from next week.

Clare explained: “While it’s worth remembering that nearly half of pensioners don't receive the full state pension, there are currently people who only receive the state pension and already pay tax on it. 

“That's normally because they’ve delayed taking their state pension or have larger amounts of Additional State Pension.

“These people will likely have an increased tax bill.”

The Additional State Pension is paid to those who reached state pension age before April 6, 2016.

It is additional money paid on top of the basic rate state pension based on your individual circumstances.

For example if you paid into the SERPS scheme in between 1978 and 2002.

In May 2024, then Chancellor Jeremy Hunt said the income tax personal allowance would be frozen at £12,570 until 2028.

The freeze was first put in place in 2021.

In her first Budget in October that year, Chancellor Rachel Reeves had been widely expected to extend the freeze beyond 2028.

However, she confirmed the Government would increase the thresholds in line with inflation from this date.

Unfreezing these thresholds means people will be able to earn more without paying more tax.

It's worth bearing in mind, if you are already a state pensioner paying income tax, you can minimise the amount you pay, Clare said.

If you earn money from a defined contribution pension, a type of workplace pension, you can adjust how much you withdraw to avoid tipping your income over income tax thresholds.

If you have any money in an ISA, you can withdraw from it tax-free too.

If you've got the Budget you could contact a financial advisor, with the average UK hourly rate charged about £150.

INCOME TAX RATES

You currently pay no income tax if you earn £12,570 or less.

On earnings between £12,570 and up to £50,270 you pay the basic income tax rate of 20%.

So, if your earnings are £20,000, you pay income tax on £7,429.

Earnings between £50,270 and up to £125,140 are taxed at 40%.

The additional income tax rate, which applies to earnings over £125,140, is 45%.

Income tax thresholds generally rise yearly so that people can earn more without paying more tax.

However, the Government has frozen them in recent years in order to boost its coffers.

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