The Department for Work and Pensions (DWP) has revealed that nearly 12.7 million people in Great Britain are of State Pension age. However, Adam Pope, a retirement expert from Spencer Churchill Claims Advice, has cautioned that close to two million individuals over the State Pension age will experience the financial effects of the Personal Allowance freeze within the next four years (by 2028).
Currently, about 8.1 million (64%) of these individuals pay tax in retirement, primarily due to supplementary income from workplace or private pensions on top of their State Pension. It is predicted by Spencer Churchill that almost 900,000 more people will surpass the Personal Allowance threshold of £12,570 during this financial year.
It’s crucial to note that elderly individuals whose only income this year is the State Pension will not be taxed, and anyone with additional income who does not directly pay HM Revenue and Customs (HMRC) through earnings, will not receive a tax bill until June or July 2025, which must be settled by the end of January 2026.
The full New State Pension amounts to £221.20 per week and as payments are typically made every four weeks, this equates to £884.80 each pay period. Over the 2024/25 financial year, this represents an increase of £902, raising the annual income from State Pension alone from £10,600 to £11,502.
The new State Pension figures could leave pensioners with a tax headache. With an increase in the full rate of the Basic State Pension to £169.50 weekly or £678 each pay period for the 2024/25 financial year, pensioners will see an annual income hike from £8,122 to £8,814, reports the Daily Record.
However, individuals should be wary as there’s only £3,756 leeway before the personal tax threshold is hit, which translates to just an extra £313 per month in additional income before being taxed.
Pensions expert Adam Pope voiced concerns, stating: “Freezing income tax thresholds for pensioners is worrying and could really affect their financial situation. Almost two million pensioners are expected to be hit by this in the next four years, meaning many of them will have to pay more tax.”
For those heavily reliant on the State Pension, the static tax thresholds are alarming. Pope warns: “This is especially tough for those mainly living off the State Pension. With no change in the tax thresholds, they could find themselves owing more tax than they expected, making things hard if they don’t have much to begin with.”
Elaborating on the issue, Pope added: “As the State Pension amount goes up, more pensioners could have to pay more tax, making life harder for those already struggling. Over 60 per cent of pensioners are paying income tax, up from about 50 per cent in 2010.”
“What’s more, keeping income tax thresholds the same could mean pensioners have less money to spend. By 2027/28, the average tax-paying pensioner could be £1,000 worse off which could really affect their living standards and financial safety.”
Adam also highlighted a disparity in treatment under current government policies, saying: “While Conservatives cut National Insurance contributions for workers, people in retirement who do not pay National Insurance are being largely overlooked.”
He went on to underscore the importance of inclusive policy-making: “It’s important for those making policies to think about the needs of pensioners too, especially those who can’t earn more money.”
He then called for a review to ensure fairness: “Given all this, it’s clear that we need to look again at how income tax policies affect pensioners and find ways to protect their money. Listening to what pension experts and groups fighting for pensioners say is key to making sure the tax system is fair for everyone, including those living on a fixed income.”
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