Those claiming the state pension could be dragged into paying taxes next year as their payment sees a substantial boost.
These predictions come from recent earnings figures released by the Office for National Statistics (ONS), stating that the state pension could increase by 8.5 percent next April.
If this happens, the average weekly new state pension could rise from £203.85 to £221.20, while the basic state pension could go up from approximately £156.20 to £169.50 per week.
While this might seem like welcome news for retirees, it could also have unintended tax consequences.
Jason Hollands, Managing Director at wealth management firm Evelyn Partners, stated the fact that the state pension is now set to rise by at least 8.5 percent in April will inflame an already divisive triple lock debate.
He said: “Both Conservatives and Labour have pledged a commitment to the triple lock in their manifestos for the upcoming election. And the policy of the current Government is to keep the personal allowance frozen until at least April 2028 at £12,570, with no indication of an alternative policy from Labour.
“If this year’s triple lock determines an 8.5 percent rise in the state pension, that will take the new flat rate pay out to £11,501 in the 2024/25 tax year.
“In the subsequent three years, it will require triple lock increases of just a sliver greater than three percent to take the annual state pension above the annual personal tax allowance.”
The annual income tax statistics from HM Revenue & Customs has estimated that in this tax year there are 8.1million income tax payers above the state pension age, a 25 percent increase on the 6.47million pensioners who paid income tax in 2020/21.
Evidently, future increases in the state pension alongside frozen allowances in the next few years threaten to add millions more to that total.
Mr Hollands added: “As for the current income tax equation facing pensioners, in this tax year the state pension takes up all but £1,970 of the personal tax allowance, and if it rises by 8.5 percent for 2024/25 then just £1,069 of a pensioner’s tax exemption will be left after the state pension is taken into account.
“So anyone with even a very modest private income will be tipped into paying basic rate tax at 20 percent, with some estimates expecting half a million more pensioners to become taxpayers in the next tax year.”
While pension saving can still be very tax-advantageous – particularly if a saver is a higher or additional rate taxpayer in their working life but then a basic rate payer when they draw on their pension – Mr Holland explains that this serves to remind today’s savers of the value of ISAs.
This can provide a valuable supplementary income to pensions during retirement which is not taxed at access. Although contributions to ISAs for most people will be made from taxed income.
- April 2024: 8.5 percent triple lock increase takes new flat rate state pension to £11,501
- April 2025: three percent increase = £11,846
- April 2026: three percent increase = £12,201
- April 2027: three percent increase = £12,567
The triple lock, a policy implemented in 2010, means the state pension increases each year in line with earnings, price rises, or 2.5 per cent – whichever is higher.
