State pensioners receiving the new full state pension are edging perilously close to paying income tax to HM Revenue and Customs (HMRC), according to a financial expert. The new state pension, administered by the Department for Work and Pensions (DWP), applies to men born after 1951 and women born after 1953.
Rising Pension Nears Tax Threshold
Derence Lee, Chief Finance Officer at Shepherds Friendly, warned that the full new state pension, which increased to £11,973 in April, is approaching the personal allowance cap of £12,570, which remains frozen until 2031. This means more retirees are at risk of having to pay income tax on their pension income.
Lee explained, "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."
Triple Lock Impact
The triple lock policy has been instrumental in helping pensioners keep pace with high inflation. However, Lee cautioned that if the tax-free allowance remains static, some of the recent pension increases could effectively be reclaimed through income tax. For pensioners who rely primarily on their state pension to cover essentials, even a small tax bill could significantly affect their finances.
Lee advised pensioners to prepare now to ensure their income keeps pace with costs and maintain financial stability.
Recommendations for Pensioners
Those still working part-time should consider making additional private pension contributions. Lee also suggested that individuals approaching retirement review how ISAs, workplace pensions, and diversified investments can help build a more resilient income stream.
The expert called on the Labour government to provide "clear guidance on pension taxation and savings."
Government Commitment
Chancellor Rachel Reeves has confirmed that individuals whose only income is the state pension will not pay any income tax on it during this Parliament. However, the full new state pension is projected to surpass the income tax-free allowance from April 2027.
Speaking to Martin Lewis of BBC and ITV, Reeves stated, "And so I make that commitment for this Parliament. You're right, 2027 looks like the time that it will cross over. We are working on a solution, as we speak, to ensure that we're not going after tiny amounts of money." She added that she would not make commitments beyond the current Parliament but noted that a simple workaround is being considered.
