State Pension tax bill warning to nearly one million older people ahead of new pay rates this month

Financial experts from Spencer Churchill are warning that up to 900,000 retirees may face an unexpected tax bill at the end of the new financial year due to income from their State Pension. Pensioners may have to start setting money aside to pay income tax bills as the Personal Allowance will remain frozen at £12,570 during the 2024/25 financial year.

Due to the annual State Pension uprating of 8.5 per cent this month, more people in retirement are expected to have an income over the Personal Allowance. From April 8, someone on the full New State Pension will see their payments go up from £203.85 per week to £221.20 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 see payments go up from £156.20 per week to £169.50 - 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.

A spokesperson for Spencer Churchill breaks down the impact of the State Pension uprating coupled with the current personal tax allowance threshold.

On the number of affected retirees

The spokesperson said: “This year, up to 900,000 retirees, particularly those benefiting from the Marriage Allowance, might find themselves paying taxes on their State Pensions for the first time. This is a direct consequence of the substantial rise in State Pensions and the freezing of tax thresholds. It's a significant change that requires careful financial review and planning."

Guidance for affected pensioners

The spokesperson said: "For those among the 900,000 affected, especially the elderly relying on the Marriage Allowance, it's crucial to reassess your tax position. With the New State Pension potentially pushing you over the personal allowance limit, you might face unexpected tax liabilities. It's important to calculate if continuing to transfer part of your allowance to your spouse remains beneficial under these new conditions."

Steps to take for financial management

The spokesperson said: "If you're one of the many impacted by this change, start by reviewing your pension income against the frozen tax thresholds. Consider consulting a financial advisor to understand the best course of action - whether to continue with the Marriage Allowance or adjust your tax strategy to mitigate any potential financial strain."

The UK Government recently rejected an online petition calling for income tax on the State Pension to be scrapped in order to help “reduce the tax burden on pensioners”.

More than 45,300 people have signed the ‘Make State Pensions tax-free’ petition, which was created after it was announced in November that the personal tax allowance threshold will remain frozen at £12,570 during the 2024/25 financial year.

In a written response, the Treasury said that “the Personal Allowance is set at a level high enough to ensure that pensioners whose sole income is the New or Basic State Pension do not pay income tax” adding that the UK Government has “nearly doubled the income tax Personal Allowance since 2010 (30% higher in real terms), ensuring some of the lowest earners do not pay income tax”.

You can view the full petition and Treasury response on the petitions-parliament website here.

New State Pension payment rates 2024/25

These payments will rise by 8.5%:

• Full payment rate: £221.20 (from £203.85)

• Every four-week pay period: £884.80 (from £815.40)

Basic State Pension payment rates 2024/25

These payments will rise by 8.5%:

• Category A or B Basic State Pension (full rate): £169.50 (from £156.20)

• Every four-week pay period: £678.00 (from £624.80)

• Category B (lower) Basic State Pension - spouse or civil partner's insurance: £101.55 (from £93.60)

• Category C or D - non-contributory: £101.55 (from £93.60)

Additional pension payments

Increments to the following will rise by 6.7%:

• Maximum additional pension (own plus inherited): £218.39 (from £204.68)

Increments to the following will rise by 6.7%

• Basic pension

• Additional pension

• Graduated Retirement Benefit (GRB)

• Inheritable lump sum

Addition at age 80: £0.25 (no change)

Increase of Long-term incapacity for age

• Higher rate: £28.40 (from £26.60)

• Lower rate: £14.20 (from £13.30)

Invalidity Allowance (Transitional) for State Pension recipients

• Higher rate: £28.40 (from £26.60)

• Middle rate: £18.20 (from £17.10)

• Lower rate: £9.10 (from £8.55)

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