Hundreds of thousands of pensioners are being warned they may soon have to start putting money aside for “unexpected” tax bills.
State pension rates increased by 8.5 percent this month, in line with September 2023’s wage growth figures.
While this comes as a welcome boost to many, the latest hike could lead 400,000 people into income tax brackets.
The full basic state pension has risen to £169.50 per week, while the full new state pension is now £221.20 per week. This translates to an annual income of £8,814 and £11,502, respectively.
While both figures remain below the current personal tax allowance of £12,570, many people also receive an additional state pension.
The additional state pension comprises three different schemes. These include the state second pension (2002-2016), SERPS (State Earnings Related Pension Scheme, 1978-2002), and the state pension top-up (October 12, 2015 – April 5, 2017).
When combined with a basic state pension, these amounts could result in certain pensioners receiving an additional £200 per week, potentially exceeding the tax allowance.
Tax expert Andy Wood from Tax Natives said: “If your state pension is over £242 per week, you may face unexpected tax bills due to the frozen personal tax allowance.”
“With an 8.5 percent increase in state pension from April, pensioners receiving over £242 per week may enter the tax net. The frozen tax threshold of £12,570 heightens the risk of unexpected tax demands.
“For example, those on the full new state pension will see a weekly rise from £203.85 to £221.20. This means an extra £902 per year. While it’s a boost, pensioners need to be aware of potential tax implications due to the fixed personal tax allowance threshold.”
He explained: “HMRC may use a ‘simple assessment’ to notify pensioners of tax liability. This means you could receive a tax bill after the tax year ends. It’s crucial to be aware of this possibility to plan accordingly.”
Tax owed on state pensions is not automatically collected as state pensions are paid in full before any tax deductions are made.
This leads to HM Revenue and Customs (HMRC) using the “simple assessment” system.
Under this system, the Department for Work and Pensions (DWP) informs HMRC at the end of the tax year about the total amount of state pension received by individuals.
If applicable, HMRC will contact the pensioner at the end of the tax year to inform them they have not paid the tax due on their state pension.
The person will then be required to make the tax payment before January 31 of the next financial year.
Pensioners vulnerable to this situation are encouraged to plan ahead to avoid spending all of their state pension funds during one financial year, only to face a tax bill in the next.
It’s estimated that one in five of these pensioners, or more than 400,000, may have no other source of income from which HMRC can collect the tax owed.
Therefore, they may need to look into setting aside a portion of their state pension each month to ensure they have sufficient funds available to cover a future tax bill.
Adam Pope, pension expert at Spencer Churchill Claims Advice said: “Every year, the amount of money retirees get from the state pension goes up and brings them closer to having to pay income tax.
“Retirees need to be well informed of these changes because it affects how much money they have and if they need to pay taxes.”
He added: “It’s a real worry that retirees might get bills for taxes they didn’t expect, especially if they only get the state pension. Getting advice from a legal expert is important to help them understand and plan for any unexpected tax issues.”
HMRC figures show that the number of those aged 65 and over who pay income tax increased by 10 percent from 7.73 million in 2022/23 to 8.5 million in 2023/24 after the 10.1 percent increase in the state pension in April 2023.
