More than 650,000 dragged into paying more tax from today – are you one of them
STATE pension payments have increased to £11,973 a year as of today, benefiting millions of retirees.
However, this rise will push 650,000 more pensioners into paying income tax over the next 12 months.
This is because state pension payments have gone up, but income tax thresholds remain frozen until 2028, so more people now earn enough to have to pay income tax.
The state pension rises each year under the “triple lock” system, which ensures it increases by whichever is highest: wage growth, 2.5%, or September’s inflation rate.
This year, the rise is based on wage growth, resulting in a 4.1% increase.
As a result, the full rate of the new state pension has gone up from £221.20 per week to £230.25, equating to £11,973 annually.
Meanwhile, the basic rate of the old state pension has risen from £169.50 per week to £176.45, totalling £9,175.40 per year.
The personal allowance — the amount you can earn each year without paying tax — remains fixed at £12,570.
If your income exceeds this threshold, you will be required to pay income tax on the amount above £12,570.
Although the new increased state pension headline rates remain below the income tax threshold, 650,000 pensioners will still be liable to pay tax on their state pension due to additional top-ups and extra payments in 2025/26.
For example, people on the old state pension can get extra money from an earnings-related pension, called Serps, which can pay up to £11,356 a year.
Meanwhile, those who choose to delay claiming their state pension can benefit from increased payments, as interest accrues during the deferral period, boosting the overall amount received.
Steve Webb, partner at pension consultants LCP said: “The repeated freeze of the income tax threshold, coupled with some quite significant increases in the state pension have meant more pensioners paying more tax.
“But it has also meant an increase in the number of pensioners whose state pension on its own is enough to take them into the tax net.
“This figure rises by an extra 650,000 as a result of this April’s pension rise.”
It’s worth bearing in mind, if you are already a state pensioner paying income tax, you can minimise the amount you pay.
For instance, if you have income from a defined contribution pension – a type of workplace pension—you can manage how much you withdraw to ensure your total income stays below certain tax thresholds, helping you avoid higher rates of income tax.
Plus, if you have savings in an ISA, you can withdraw money from it entirely tax-free, providing another way to minimise your taxable income.
The Office for Budget Responsibility forecasts that the triple lock will lead to a 4.6% increase in April 2026, with annual payments for the new state pension rising to £12,523.68.
This amount falls just £46.32 short of the personal allowance threshold.
Jon Greer, head of retirement policy at Quilter, said: “That leaves the UK potentially only one year away from pensioners having to effectively hand a portion of their state pension back to the Exchequer in tax, which to many would seem perverse.
“Reeves had committed to keeping allowances frozen until 2028 but, depending on what the actual uprating figure may be, could look to avoid the full state pension exceeding the personal allowance via the Autumn Statement later this year.
“What was intended as a mechanism to protect pensioners from poverty is now colliding with fiscal drag.”
Earlier projections indicate that by April 2026, as many as nine million pensioners could face income tax bills.
What is the personal allowance?
THE personal allowance is the amount you can earn each year tax-free.
In the current tax year – which runs from April 6 2024 to April 5 2025 – the figure is £12,570.
Any earnings above this threshold are taxed at different rates, depending on the income bracket.
However, this amount may be larger if you claim certain allowances, including a blind person’s allowance, marriage allowance and child tax credit.
Income tax also applies to money you make outside your job, not just your earnings.
But there are also some tax-free allowances on top of the personal allowance for these other sources of income.
If you are self-employed, you don’t have to pay tax on savings interest, dividends and the first £1,000 of income.
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.