The forthcoming 4.1% state pension increase could potentially reduce the income of retirees, especially those with more than one pension.
Rachel Reeves’ autumn budget confirmed that the state pension would rise by 4.1% in April, equating to roughly £475 a year for those on the new state pension according to MSE.
However, recent social media warnings suggested this could actually decrease pensioners’ income by £130 a month.
While this isn’t strictly accurate, pensioners are advised to be mindful of potential tax obligations as the Chancellor also announced that the personal allowance threshold for income tax will remain frozen for the next few years.
Currently, people can earn up to £12,570 a year before they are liable for income tax.
Any earnings above this amount will incur a 20% income tax bill which is the basic rate, while earnings over £50,000 will attract a 40% income tax bill at the higher rate and annual income over £125,140 is taxed at an additional 45% rate.
Pensioners will likely need to familiarise themselves with these rates in the near future as the April increase means the annual new state pension will be £12,016.75.
This implies that pensioners can earn just over £550 without triggering a tax liability.
However, this sum includes any other personal or workplace pensions they may have, as well as retirement annuities, rental income and certain benefits like Carer’s Allowance or Bereavement Allowance.
Due to the combined state pension rise and personal allowance freeze, many retirees are anticipated to become liable for income tax for the first time in their retirement or be pushed into a higher tax bracket. It’s estimated that 8 million pensioners already pay some tax in retirement, so this may not be entirely new.
Your pension provider usually calculates and automatically pays tax on pension funds. It’s also important to note that, in terms of income tax, only the amount above the threshold you earn is taxed at that rate, not your entire income.
Furthermore, if you’re in Scotland, income tax rates and bands are measured differently.
