Nearly one million people over State Pension age due to pay tax for first time this year

Retirement expert Adam Pope from Spencer Churchill Claims Advice has warned that nearly two million people over State Pension age will feel the financial impact of the freeze on the Personal Allowance within the next four years. The latest figures from the Department for Work and Pensions (DWP) show there are nearly 12.7 million people over State Pension age across Great Britain, including more than 1.1m living in Scotland.

However, of that overall total, some 8.1m (64%) currently pay tax in retirement, largely due to additional income from workplace or private pensions on top of their State Pension. Spencer Churchill predicts nearly 900,000 more people will exceed the Personal Allowance threshold of £12,570 over the current financial year, with the further 2m expected before the freeze ends in 2028.

It’s important to be aware that older people whose sole income this year is the State Pension will not pay tax, and anyone with additional income who does not pay HM Revenue and Customs (HMRC) directly through earnings, will not receive a tax bill until June or July 2025, which must be paid by the end of January 2026.

The full New State Pension is worth £221.20 each week and as payments are typically made every four weeks, this amounts to £884.80 each pay period. Over the 2024/25 financial year, this is an increase of £902, taking the annual income from State Pension alone from £10,600 to £11,502.

This leaves just £1,068 before the personal tax threshold is exceeded, so anyone with additional income of £89 or more per month - on top of State Pension - may receive a tax bill the following year.

Someone on the full rate of the Basic State Pension will receive £169.50 each week - this amounts to £678 each pay period. Over the 2024/25 financial year, this is an increase of £692, taking the annual income from £8,122 to £8,814.

This leaves just £3,756 before the personal tax threshold is exceeded, equivalent to additional income totalling £313 per month.

Adam Pope said: “Freezing income tax thresholds for pensioners is worrying and could really affect their financial situation. Almost two million pensioners are expected to be hit by this in the next four years, meaning many of them will have to pay more tax.

“This is especially tough for those mainly living off the State Pension. With no change in the tax thresholds, they could find themselves owing more tax than they expected, making things hard if they don’t have much to begin with.”

The pensions expert continued: “As the State Pension amount goes up, more pensioners could have to pay more tax, making life harder for those already struggling. Over 60 per cent of pensioners are paying income tax, up from about 50 per cent in 2010.

“What’s more, keeping income tax thresholds the same could mean pensioners have less money to spend. By 2027/28, the average tax-paying pensioner could be £1,000 worse off which could really affect their living standards and financial safety.”

Adam also said that while the Conservatives cut National Insurance contributions for workers while in government, people in retirement - who do not pay National Insurance - are being largely overlooked.

He said: “It’s important for those making policies to think about the needs of pensioners too, especially those who can’t earn more money.

“Given all this, it’s clear that we need to look again at how income tax policies affect pensioners and find ways to protect their money. Listening to what pension experts and groups fighting for pensioners say is key to making sure the tax system is fair for everyone, including those living on a fixed income.”