Exact date state pension will be taxed after the triple lock rise confirmed
PENSIONERS will soon have to start paying tax on their state pension cash after the government confirmed its commitment to the triple lock in last week’s Budget.
Annual rises to the old age benefit expected in the coming years combined with a freeze to tax thresholds will see payments surpass the tax-free personal allowance for the first time.
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 the Budget.
While it was good news for taxpayers, the current freeze will still hit those getting the state pension.
Hundreds of thousands of pensioners who get the full new state pension – currently worth £11,502.40 a week – will be dragged into paying tax on this income alone from April 2027 for the first time.
Former pensions minister and current partner at LCP Sir Steve Webb crunched the numbers under the triple lock system.
The triple lock sees the state pension rise each year in line with whatever is highest out of: wages for May to July, 2.5% or September’s inflation figures.
The state pension will rise to £11,973 from April 2025, in line with a 4.1% rise in wages.
The following years from April 2026 and April 2027, the benefit is expected to rise by 2.5% based on the economic outlook.
It would take payments to £12,272 in 2026 and then £12,578.80 in 2027 – surpassing the £12,570 a year standard tax-free personal allowance for the first time.
The allowance is the amount of money you can earn before you have to pay tax on your income.
Sir Steve 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.”
Around 700,000 on state pensions are already expected to be drawn in to paying tax for the first time this year.
Although the current maximum new state pension comes is less than the personal tax-free allowance, income from other sources like personal or workplace pension and savings means they are being pushed in to paying tax.
It’s expected that a further 300,000 over state pension age will be told they need to pay tax from April 2025.
Those on the old state pension who retired before April 2016 are currently paid less than the new maximum state pension.
But they may get additional payments on top that put them over the threshold.
Those who do not get the maximum new payment because they have less than 35 qualifying year of National Insurance contributions (NICs) will not hit the £12,570 personal allowance threshold as soon as 2027.
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.
But they may do in the years after depending on how the payments and tax thresholds rise each year.
The state pension could also become taxable earlier than 2027 if inflation or wages spike above 2.5% in future years
Can I avoid paying tax on my pension?
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 individual savings account, or ISA for short, is a type of savings account in which you can save up to £20,00 each 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.
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