State pension tax warning as many could be pushed into paying income tax
State pensioners have been urged to prepare for a larger tax bill when the state pension increases next year.
The state pension is set to rise 8.5 percent in line with the triple lock and this could mean many older Britons paying income tax for the first time.
Samuel Gee, of Manning Gee Investments, told Express.co.uk: “With the state pension hike comes an unexpected challenge – the potential shift of many retirees into the realm of income taxpayers.
“This shift is driven by the increase in taxable income due to the pension boost, which pushes them across the income tax threshold for the first time since retirement, or further increases their tax liability as a percentage of their income.
“For those who are already income taxpayers, the increased tax implications are not to be underestimated.”
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He explained how those who already pay income tax and who are on the full new state pension, of £203.85 a week, will see their tax bill increase by at least £180.40. This will effectively reduce their increase from £902 a year to £713 a year.
Mr Gee added: “The implications extend even to those receiving the minimum income to sustain a basic retirement, which stands at £12,800 according to retirementlivingstandards.org.uk.
“The freeze on the £12,570 personal income tax allowance exacerbates the situation, potentially turning even those with the most modest retirement income into income taxpayers.
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“While the triple lock ensures that pensioners enjoy a boosted state pension, this fiscal transformation underscores the need for careful financial planning and guidance, particularly in terms of tax implications for retirees across the UK.”
Pensioners could face another growing tax bill, on the interest from their savings. A person with a yearly income above £17,570 can earn £1,000 of interest tax-free while those with an income below this level can potentially earn £5,000 in interest without paying tax.
Mr Gee said: “To put it in perspective, consider a single pensioner with £40,000 in savings, not held in an ISA, earning 5 percent interest.
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“This situation results in a £200 annual tax liability, reducing the interest earned from £2,000 to £1,800.
“For a typical couple, both taxpayers, with £100,000 in savings, the tax implications amount to £600 in total. This is a significant factor to bear in mind as your savings interest accumulates in your accounts.”
To minimise one’s tax bill, the wealth expert encouraged pensioners to use their ISA allowance, which allows a person to deposit up to £20,000 a year in ISAs, which are not taxed.
Pensioners aged under 75 can also still make contributions to their pension to get some tax relief. Those with a defined contribution pension may also be able to stay within lower tax brackets by taking smaller drawdown amounts.
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If you hfined contribution pension, consider the timing
of withdrawals. Taking smaller withdrawals over time might help you stay within
lower tax brackets, and be clever with how you take your tax free lump sum, if you
haven’t taken all of it already
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