Martin Lewis state pension ‘would be taxed’ warning over income limit | Personal Finance | Finance

Martin Lewis has warned state pensioners of a tax rule meaning they could get a surprise bill from HMRC. He explained the key rules around how the state pension works on his BBC podcast.

He walked listeners through some of the rules to know regarding how your National Insurance contributions build your entitlement, and how the DWP benefit is treated by HMRC. One key issue he was keen to point out is that your state pension payments are taxable.

He said of the state pension: “Worth noting, that payment is taxable. Now, when something is taxable, it doesn’t mean it’s automatically taxed. It means it counts towards your tax thresholds.”

Tax threshold rule

The key rule to note here is the personal allowance. This is the maximum you can earn each tax year without paying income tax, and is currently £12,570 a year.

As Mr Lewis explained: “You can earn £12,570 a year, most people, without paying any tax on it. So if you only had the full new state pension at the moment, you wouldn’t pay any tax on it.” However, the financial journalist warned that the moment you have other streams of income, the taxman may come knocking.

Mr Lewis said: “But if you had any other taxable income, say from working or private pensions…then in total, anything above the threshold would be taxed.”

How do you build your state pension entitlement?

You build up how much state pension you are entitled to receive through paying National Insurance contributions. But Mr Lewis warned against thinking that you are actually saving into a pot by paying this tax.

He said: “You’re not building up a pot of money for it. What happens with the state pension is every year that you work and earn over a certain amount, or if you have childcare responsibilities, or if you’re on certain benefits, you get a National Insurance credit.”

He likened these credits to “tokens” that go into your “National Insurance piggy bank”. To get any state pension at all under the current system, you must have a minimum of 10 years of these contributions.

Mr Lewis said: “If you have 35 years of National Insurance credits, so you’ve worked 35 years say, or more, you will get the full state pension.” The full new state pension currently pays out £241.30 a week, which equates to roughly £12,500 a year.

But Mr Lewis warned that this is a “rough” 35 years and that you should think of this as “an idea rather than a fixed rule”. You can check how much state pension you are currently due to receive using the forecast tool on the gov.uk website.

Why the state pension is ‘not enough’

While £12,500 a year sounds like a helpful sum to add to your income, Mr Lewis pointed out that it is rarely enough to support a comfortable lifestyle on its own. He said: “Even so, £12,500 a year does not, for most people, fulfill the requirement of what they will need to live in retirement.

“Because most people would want roughly around two-thirds of what they were getting when they were working when they retire, and £12,500 isn’t that.” To bridge this gap, he strongly advised workers to be building up their own retirement savings.

He urged: “Which is why you’re going to want to be looking at getting a private or workplace pension, as well. And the rule with those is the earlier you start, the better.”