DWP state pensioners told don’t be caught out by ‘nasty £3k surprise’ | Personal Finance | Finance
State pensioners have been warned of the possibility of paying tax on their payments following April’s £470 annual increase.
Finance expert Shimeon Lee from the TaxPayers’ Alliance cautioned that due to the Triple Lock and a freeze in tax thresholds, a significant number of older Britons might be hit with an unexpected “nasty surprise tax” this year. Based on the Triple Lock pledge, the state pension benefit increases by either the rate of inflation, average wage growth, or a minimum of 2.5%, depending on which is the highest of the three. This April witnessed a 4.1% boost in state pensions, with new claimants receiving a weekly amount of £230.20. Over the course of a year, this increase means pensions rise by £470, climbing from £11,502 to £11,972. Therefore, the basic state pension saw payments rise weekly to £176.45, summing up to £9,175 every year, reports the Mirror.
However, Mr Lee has issued a stark caution to pensioners, stating: “Those with incomes under the personal allowance generally do not pay tax on their income. But because of these frozen tax thresholds, which have been frozen since 2021, more and more people are being dragged into paying tax. That includes more people being pulled into paying the higher rate of income tax.”
He added that many pensioners risk crossing the tax threshold and becoming liable for taxation because the state pension increments each year whilst the threshold remains static.
He said: “Frozen tax thresholds affect the poorest people in the country the most, and they can be a really nasty surprise for those who did not expect to be paying tax and who are already struggling to make ends meet.
“Now, the personal allowance, if it had risen with inflation, should be around £15,500. That’s a huge difference. It means people are paying tax on an additional £3,000 of income.
“If you take the income tax rate of about 20%, plus National Insurance of around 8%, that gives you a tax rate of roughly 28%.”
An analysis by former pensions minister Steve Webb, now a partner at pension consultancy LCP, found that around 350,000 more pensioners will pay tax this year compared to 2024/25. He pointed out that 650,000 retirees will be paying income tax on their state pension alone in this tax year.
The Personal Tax Allowance currently stands at £12,570, which is the amount you can earn each year without having to pay tax on it.
This threshold, like others, is expected to stay frozen until April 2028. Under the personal allowance, earnings up to £12,570 are tax-free, and any income above this is taxable.
For instance, if your earnings are £50,270 – the upper limit of the 20% tax band – you would pay 20% tax on £37,700 of it. The personal allowance also encompasses income from pensions.
This implies that if your pension income exceeds £12,570, you’ll be taxed on the surplus amount. For instance, if your total pension earnings amount to £14,000 annually, then you’ll be liable to pay 20% tax on the excess £1,430.
As per data published by LCP in June, approximately 8.51 million elderly Britons were taxed on their pensions in 2024/25, an increase of 660,000 from the previous year’s figure of 7.85 million.
In the fiscal year 2020/21, when the pension age was raised to 66 years, there were 6.47 million individuals paying tax on their pensions. This indicates that over the past three years, an additional two million pensioners have been pulled into the tax net on the income they received from both state and private pensions.
