PENSIONERS will all have to start paying tax on their state pensions cash due to triple lock.
This is due to a combination of hefty state pension rises and frozen tax thresholds.
Last week in her inaugural Budget, Chancellor Rachel Reeves announced in a surprise move that tax thresholds will increase once again in 2028.
Ms Reeves had been widely expected to extend the freeze, which has been in place since 2021, in today’s Budget.
But for hundreds of thousands of pensioners who get the full new state pension, this will be a little too late because they’ll be dragged into paying taxes in 2027.
Former pensions minister and current partner at LCP Sir Steve Webb has crunched the numbers and found that if the triple lock system stays in place, those whose sole income comes from the benefit will be forced to pay tax for the first time.
That’s because the triple lock system sees the state pension rise in line with whatever is highest out of: wages for May to July, 2.5% or September’s inflation figures.
This does mean that the rate will rise to at least £236 in April 2026 and £241.90 in April 2027.
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.
The April 2027 state pension rate will be £12,578 per year even if it just goes up by the minimum 2.5%, just £8 above the tax-free allowance.
This could mean hundreds of thousands of pensioners are taxed on just £8 per year, with a tax bill of £1.60.
If tax-free personal allowance then rises by CPI but the state pension rises by more, then this situation will continue indefinitely, Sir Steve explained.
He said: “A combination of an increasing state pension and frozen tax thresholds means we will soon be in the nonsensical situation where the new state pension will be just a few pounds above the income tax threshold.
“This means that people whose only income is the standard new state pension will be dragged into income tax.
“Long gone are the days when retirement meant no longer having to deal with the tax office.”
State pension goes up from the first Monday after the new tax year starts, which means payments will rise from April 12, 2027.
This means that everyone who gets the full new state pension, for which you need 35 qualifying years of National Insurance (NI) contributions, will be paying tax on it in April 2027.
Of course, it’s worth bearing in mind that if the triple lock remains in place but inflation or wages spike above 2.5% next year then people will be paying tax in 2026.
Not only that but 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.
This is because the Chancellor confirmed that the state pension is now expected to rise from £11,502.40 to £11,975 per year.
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.
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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