State pensioners are being warned they could still receive a letter from HMRC demanding tax on their income, despite Prime Minister Andy Burnham's pledge to exempt those living solely on the state pension. The warning comes as the gap between the full state pension and the tax-free Personal Allowance narrows to just £23 a year.
The current state pension stands at approximately £12,547 annually, while the Personal Allowance Threshold remains at £12,570 after Mr Burnham said it would not change for now. This means that any pensioner with additional income of just £23 or more from savings or other sources could breach the threshold and become liable for income tax.
Treasury confirms exemption for state-pension-only retirees
The Treasury has confirmed that pensioners whose only income is the full new or basic state pension will remain exempt from income tax. However, older people with modest savings or a small private pension could be dragged into the tax system, according to campaigners.
Morgan Vine, director of Policy and Influencing at Independent Age, said: "Recommitting to exempting the state pension from income tax is a welcome signal that the new Prime Minister is listening to the concerns of older people on low incomes. However, questions remain about how the policy will be implemented across a complex pensions system where one solution does not."
Complex pensions system creates inequality among pensioners
Vine highlighted the disparity: "Different versions of the state pension mean some older people receiving a lower state pension and a small private pension would be dragged into the tax system, while others receiving only the State Pension will be exempt, despite the amount they receive being largely the same."
This complexity means that the promise may not protect all pensioners equally, and many could still face tax bills despite the government's assurances.
MoneyHelper explains tax rules on pension income
MoneyHelper, the government-backed financial guidance service, clarifies that pensioners must pay income tax on any income over the Personal Allowance. "After you've retired, you still have to pay Income Tax on any income over your Personal Allowance. This applies to all your pension income, including the State Pension," it states.
"Many people assume that their pension income – especially the State Pension – will be tax-free, but that's not the case. Some income, including your State Pension, is paid without any tax being taken off. But it doesn't mean that tax isn't due."
MoneyHelper explains that if tax is due on the State Pension, it is usually collected through any personal or workplace pension. "When you've reached the age you're allowed to access it you can take money out of your pension as and when you want. However, usually only the first 25 percent will be tax-free. The rest is taxable as earnings. The tax rate you pay increases when your income goes over the income tax thresholds. This means that the more money you take from your pension pot, the higher your tax bill could be."
What pensioners should do to avoid unexpected tax bills
With the £23 margin, pensioners with any savings interest or part-time earnings should check their total income against the Personal Allowance. Those who exceed it may need to complete a self-assessment tax return or contact HMRC to arrange for tax to be deducted from their pension income.
Independent Age advises older people to seek guidance if they are unsure about their tax position, as the rules can be complex and vary depending on individual circumstances.
