State pensioners have been issued a warning that their payments are on the brink of being subject to a tax bill. With annual increases, the state pension amount is creeping ever closer to the personal allowance threshold, which would mean payments being subject to income tax
As it stands, the personal allowance is fixed at £12,570 annually, whereas the full new state pension is £221.20 per week, or £11,502.40 yearly — just over £2,000 shy of the threshold. The impending rise in April will see state pension payments go up by 4.1 percent, in accordance with the triple lock, taking the full new state pension to £230.30 weekly or £11,975.60 annually.
Regarding the April increase, Rachel Vahey, AJ Bell’s head of public policy, cautioned: “The state pension will be at a level perilously close to the frozen personal allowance and should overtake it in a couple of years if things continue, thanks to frozen tax thresholds.”
Ms. Vahey highlighted that this imminent shift may compel the Government to alter its stance on state pension policies, saying: “At that point something must surely give. But slowing the increase in state pension growth or unfreezing the personal allowance both seem unlikely. It could be that this fast-approaching crunch time means the Government will finally be forced to address the question of how much the state pension should really offer, at what age, and how it can increase payments sustainably each year.”
The Government may be exploring options to maintain the affordability of the state pension, which could include raising the state pension age. It currently stands at 66 for both men and women, but is set to rise to 67 between 2026 and 2028, and further to 68 between 2044 and 2046.
Reports suggest that the latter increase to 68 may happen sooner, with the Government expected to provide an update on this within the first two years of this Parliament. Many pensioners will particularly feel the pinch this year, having lost the Winter Fuel Payment, which is worth £200 or £300 this year. The rules have shifted, changing it from a universal payment to one only available to those on means-tested benefits, such as Pension Credit.
On this issue, Ms Vahey remarked: “Criticism of the decision to scrap the Winter Fuel Payment for all pensioners except those that claim Pension Credit still lingers.vGovernment will hope this rise in Brits’ state pensions will publicly reinforce its commitment to the triple-lock, although some will still be reeling from the £200 most pensioners lost this winter.”
As we approach the new tax year, those planning their state pension budgets for 2025 should be mindful of an important deadline on the horizon. At present, you have the option to top up your National Insurance contributions towards your state pension over an extended period, going as far back as the 2006/2007 tax year, instead of the typical six years. But this extended period for topping up is available only until the conclusion of the current tax year.