HM Revenue and Customs (HMRC) has issued a crucial warning to state pensioners across the UK, highlighting a potential financial pitfall linked to a £25,000 income threshold. This alert comes as a significant state pension increase, driven by the Triple Lock policy, could unexpectedly push many retirees into a higher tax band.
The Triple Lock Boost and Its Tax Implications
Under the Department for Work and Pensions (DWP) Triple Lock, state pension payments are set for a 4.8% rise from April next year. This government policy, maintained by the Labour Party, guarantees that the annual pension increase is the highest of either average wage growth, inflation, or 2.5%. While this boost is welcome news for income, it carries a hidden consequence: as pension income grows, individuals may find themselves crossing the threshold into a higher tax bracket, resulting in a larger tax bill.
Maximising Your Tax-Free Allowances
Financial experts are urging pensioners to take a proactive approach to their finances. Chris Ball, CEO of Hoxton Wealth, offers clear guidance: "My general advice to all pensioners: Maximise your and any spouse's personal allowances to make sure you're making the most of all of your different pools of income."
Each individual in the UK has a personal allowance of £12,570 that they can earn each year without paying any tax. For a couple, this effectively creates a combined tax-free allowance of £25,140. A common mistake, according to Mr. Ball, is drawing income solely from pensions while leaving tax-efficient savings like ISAs untouched. "So, where a lot of people just draw from their pensions first, but won't take from their ISAs, they may end up in a higher rate tax band," he explained.
Holistic Financial Planning is Key
The core message from financial advisers is to view all assets as a single portfolio. "You need to look at all your assets as one," Mr. Ball stressed, recommending that those who need support should work with a financial adviser to make tax contributions as efficient as possible.
The difference in tax liability is substantial. Remaining in the basic rate tax band means paying a maximum of 20% tax on income between your personal allowance and £50,270. However, crossing into the higher rate band means paying 40% on income above £50,270 up to £125,140. Furthermore, once annual earnings exceed £100,000, the personal allowance begins to reduce by £1 for every £2 earned over that limit.
Mr. Ball also clarified which pensioner incomes are taxable, noting that the state pension, personal and workplace pensions, defined benefit pension income, and any rental income are all subject to tax. He confirmed that this is unlikely to change in the upcoming November's Budget and emphasised the importance of using both your own and your spouse's personal allowance every year to minimise your overall tax burden.
