State Pension will rise by 4.1 per cent from April 6
Millions of people claiming State Pension could face a ‘retirement tax’ as a rise comes into effect in the coming days.
Some people could end up paying tax on their incomes as State Pension payments are going up but income tax thresholds remain frozen.
State Pension, which is paid by the Department for Work and Pensions ( DWP ), increases every year based on the ‘triple lock’ – whatever is highest out of inflation, 2.5 per cent or wages.
It will rise by 4.1 per cent from Sunday, April 6, based on wages for the three-month period from May to July last year.
It means someone on a full new State Pension will see their annual income rise from about £11,502 to £11,973 – an increase of £471.
The full new basic State Pension will increase from £8,814 to about £9,175.
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But with income tax thresholds frozen until 2028, more pensioners could end up paying tax on their income.
The personal allowance will stay at £12,570, The Sun reports.
This means that the full new State Pension amount will likely breach the threshold before 2028.
Clare Moffat, pensions expert at Royal London, said: “Around 12million pensioners will receive more in their State Pension from this weekend (April 6), bringing them perilously close to the amount that can be received without incurring tax liability.
“If the ‘triple lock’ continues to rise, the state pension could soon exceed the personal allowance and be taxable.”
Pensioners earning income from other areas will be hit with higher tax bills – and this could happen earlier too.
This is because you are taxed on most job-related income, income from renting out a property and private or workplace pensions.
So, those who get income from other sources outside of the State Pension could pay more income tax from next week.
Clare said: “While it’s worth remembering that nearly half of pensioners don’t receive the full State Pension, there are currently people who only receive the state pension and already pay tax on it.
“That’s normally because they’ve delayed taking their state pension or have larger amounts of Additional State Pension.
“These people will likely have an increased tax bill.”
The Additional State Pension is paid to those who reached State Pension age before April 6, 2016.
It is extra money paid on top of the basic rate State Pension based on your individual circumstances.
For example, if you paid into the SERPS scheme between 1978 and 2002.
In May 2024, then-Chancellor Jeremy Hunt said the income tax personal allowance would be frozen at £12,570 until 2028.
The freeze was first put in place in 2021.
Chancellor Rachel Reeves had been widely expected to extend the freeze beyond 2028 but she confirmed the Government would increase the thresholds in line with inflation from 2028.
Unfreezing thresholds means people will be able to earn more without paying more tax.
Clare went on to say that State Pensioners paying income tax can minimise the amount they pay.
If you earn money from a defined contribution pension, you can adjust how much you withdraw to avoid tipping your income over income tax thresholds.
If you have money in an ISA, you can withdraw from it tax-free too.
