State pension April rise could see retirees falling into tax woes

In Rachel Reeves’ autumn budget it was confirmed that the state pension would rise by 4.1% in April, an equivalent of around £475 a year for those on the new state pension according to MSE. However, recent warnings on social media claimed this would actually cut pensioner’s income by £130 a month.

While this isn’t expressly true, pensioners are warned to be aware of their potential tax obligations as the Chancellor also confirmed the personal allowance threshold for income tax will remain frozen for the next few years too. Currently, this allows people to earn £12,570 a year before incurring income tax.

Everything earned over this amount will result in a 20% income tax bill, which is the basic rate, while earning over £50,000 will start incurring a 40% income tax bill at the higher rate and yearly income over £125,140 is taxed at the additional 45% rate. Pensioners will probably need to be very familiar with these rates in the near future as the April rise means the yearly new state pension will be £12,016.75.

This means pensioners will be able to earn just over £550 without sparking a tax liability. However, this amount includes any other personal or workplace pensions they may have as well as retirement annuities, rental income and some benefits like Carer’s Allowance or Bereavement Allowance.

Many retirees are expected to become liable for income tax for the first time in their retirement or be bumped into a higher tax bracket as a result of the combined state pension rise and personal allowance freeze. An estimated 8 million pensioners already pay some tax in retirement so this may not be all new.

Tax on pension funds are usually calculated and automatically paid by your pension provider. It’s also worth noting that, in terms of income tax, it’s only the amount above the threshold you earn that is taxed at that rate and not your entire income. Additionally, income tax rates and bands are also measured differently if you’re in Scotland.