State pension payment rise may mean you pay more tax in retirement

The state pension rise means those on the full new state pension will see payments increase from £185.15 to up to £203.85 each week and those on the basic state pension will see weekly payments rise from £141.85 to up to £156.20. However, while the increase will help offset the ongoing cost of living crisis, it also means more older people may have to pay tax on their income.

Frozen income tax thresholds mean millions of people could be pulled into a higher tax band or see a greater proportion of their money taxed.

With income tax thresholds being frozen at £12,570 until 2028, any pay rise could drag people into a higher tax bracket.

With the rise of state pension, many pensioners will now receive an annual income of £10,600.20.

Anyone receiving the full new state pension will get an extra £19 a week from Monday, April 10 onwards.

This leaves them just £1,969.80 of their annual Personal Allowance of £12,570.

Those in receipt of the basic state pension will see their payment rise to £156.20, which may be topped up further by the additional state pension.

Anyone who reached state pension age before April 2016 (and is in receipt of the full basic state pension) will get an extra £14 weekly.

However, new analysis from Standard Life, part of Phoenix Group, highlights that increases will also take them closer to the tax-free Personal Allowance limit.

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The freeing of the Personal Allowance at £12,570 since 2021/2022 means that the state pension payment has grown from 74 percent of the allowance to 84 percent for 2023/24, meaning pensioners will need just £1,969.80 of income before they start paying income tax.

Dean Butler, managing director for customer at Standard Life, told the Daily Record: “Pensioners are set to see a healthy boost to their incomes in a few days’ time as the state pension amount passes £10,000 for many for the first time.

“However, given the substantial state pension boost, it’s important to be aware of the implications this has in relation to the Personal Allowance which isn’t due to increase until April 2028.

“The Personal Allowance has remained flat in recent years and will gradually be bringing more and more people into the tax system as result.”

He explained that there are a few steps people with modest savings whose annual income is likely to be around the Personal Allowance limit can take.

While 25 percent of pension savings can be withdrawn tax free, the remainder can be taxed.

For those incomes hovering around the Personal Allowance, it’s worth ensuring they’re not taking bigger lump sums on which they might pay tax if they can be avoided.

If they do have any ISA savings these are not subject to income tax and could be a useful source of additional income.

Dean added: “An income at or just above the level of the Personal Allowance is below the Pension and Lifetime Savings Association (PLSA)’s estimate for a minimum standard of living in retirement and people in this situation might be struggling financially, even before any tax liability.”

The amount of state pension someone receives is based on their National Insurance contributions.

People usually need to have 10 qualifying years on their National Insurance record to get any new state pension and 35 years if they hope to receive the full new state pension.

They may get less than the new full state pension if they were contracted out before April 6, 2016.

To get the full basic state pension people need a total of 30 qualifying years of National Insurance contributions or credits.

For more information, people can visit the Government website.

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