HUNDREDS of thousands of retirees are set to pay tax on their state pension for the first time next year.
This is due to a combination of hefty state pension rises and frozen tax thresholds.
It is expected that more than 300,000 pensioners will be told that they need to pay tax when the state pension rises by £473 in 2025.
The figures released this week have confirmed that the state pension is now expected to rise from £11,502.40 to £11,975 per year under the triple lock.
With tax thresholds frozen until 2028, this increase will drag even more pensioners into paying tax for the first time, it has been warned.
This is because the total annual amount of income they receive will be more than their personal allowance.
The allowance is the amount of money you can earn before you have to pay tax on your income.
Under the current rules, this is up to £12,570 each tax year.
It was previously expected that around 140,000 pensioners would receive a letter for the first time this year.
But because of the proposed increase in the state pension, more than 300,0000 people are now likely to get one.
Alice Haine of Bestinvest said: “Add in frozen tax thresholds, with the full new state pension gaining ground on the standard personal allowance of £12,570 and pensioners are edging closer to the point at which their state pension income becomes liable for tax.
“Retirees already receiving a higher state pension may already be paying tax on the benefit, while those receiving a private pension income will see more of that swallowed up by tax.”
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown also pointed out that while rising state pensions are good news, the tax threat is “a hidden sting in the tail”.
She said: “While the full new state pension is currently set at £11,502 and is set to get close to £12,000 from next April it’s conceivable that in the next two years we could see it breach the £12,570 threshold and see pensioners landed with a tax bill.
“It’s also worth saying that many pensioners on the basic state pension system receive more than this as they get a top-up to their income in the form of the state second pension so receive a tax bill even if they have no other income.”
Many pensioners have other pensions – personal or workplace – and HMRC will usually take the income tax due through these pensions, Helen pointed out.
She said: “Those pensioners wholly reliant on the state pension who face paying tax will receive a simple assessment letter from HMRC telling them how much they owe.
“There have been concerns about pensioners being chased for small amounts of tax though HMRC has said they would not look to chase tax amounts that would cost more to collect than is actually owed.”
Why is this happening and is there anything I can do to avoid it?
High inflation rates mean more people in work are getting pay rises to try and keep pace with rising prices.
However, with income tax bands frozen, it means many are being pushed into the next tax bracket.
Laura Suter, director of personal finance at AJ Bell, previously told The Sun: “Pensioners looking to reduce their tax bill need to think about how they can maximise their tax-free income.
“For example, any withdrawals made from their ISAs will be free of any tax. so they can use that pot of money to boost their income without impacting their tax bill.”
An ISA is a type of savings account in which you can save up to £20,00 a year tax-free.
Laura also suggested that couples can organise their finances so they ensure they are each making use of their tax-free allowances, which might involve moving money or assets between themselves.
Helen also added that pensioners might want to use some of their pension to top up their income.
She said: “Most people can access 25% of their pension as a tax-free lump sum so they may decide to use this to top up their income without pushing up their tax bill.”
However, she also warned that pensioners below the personal allowance are going to find it increasingly difficult to avoid paying income tax in the coming years.
The finance expert added: “A full new state pension hits just over £11,500 per year and even relatively modest 3.5% annual increases would see people pushed over the threshold by the time the threshold freeze ends.”
How does the state pension work?
AT the moment the current state pension is paid to both men and women from age 66 - but it's due to rise to 67 by 2028 and 68 by 2046.
The state pension is a recurring payment from the government most Brits start getting when they reach State Pension age.
But not everyone gets the same amount, and you are awarded depending on your National Insurance record.
For most pensioners, it forms only part of their retirement income, as they could have other pots from a workplace pension, earning and savings.
The new state pension is based on people’s National Insurance records.
Workers must have 35 qualifying years of National Insurance to get the maximum amount of the new state pension.
You earn National Insurance qualifying years through work, or by getting credits, for instance when you are looking after children and claiming child benefit.
If you have gaps, you can top up your record by paying in voluntary National Insurance contributions.
To get the old, full basic state pension, you will need 30 years of contributions or credits.
You will need at least 10 years on your NI record to get any state pension.
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