Will YOU be taxed on your state pension? Higher payments to create ‘unfairness’ between pensioners with two-tier system

THE state pension looks set to rise by £489 to £13,036 a year from April 2027, forcing millions to pay tax on the payment for the first time. This is because under the triple lock the state pension is expected to rise by 3.9% next year. Millions of pensioners are set to pay tax on their income for the first time Credit: Getty Images – Getty Meanwhile some pensioners will be exempt from the tax hit Credit: Getty – Contributor However, the welcome uplift means that the state pension will go above the £12,570 threshold at which you start to pay income tax for the first time. So pensioners face a nasty bill. Sign up for the Money newsletter Thank you! The triple lock calculation decides whether the state pension will increase each year by September’s inflation figure, average earnings growth between May and July or 2.5% – and uses whichever is highest. It is likely that average earnings growth will be used to calculate the increase as inflation is currently at 2.9%. Jessica Chantler, chartered financial planner at Quilter, said: “The issue is that for millions of retirees, the state pension is only one part of their retirement income. “For many pensioners there will be limited scope to avoid paying tax altogether once their total income exceeds the personal allowance.” Here we explain if YOU will be affected and how you would pay your bill. What’s changing? Millions of workers and pensioners will be forced to pay tax for the first time Credit: PA Income tax thresholds are frozen until April 2031, which will force millions of pensioners and workers to pay tax for the first time or drag them into higher tax bands. Most read in Money To avoid this problem, in the Budget last year the Government said that anyone whose only income comes from the state pension will not have to pay income tax. Although it is still unclear how this will work in practice. The tax break is expected to save pensioners around £88 in 2028/29, rising to around £220 in 2029/30, according to consultancy Lane Clarke & Peacock. But only 700,000 pensioners are set to benefit, while approximately 12.5million will miss out and have to pay tax on their state pension. Steve Webb, former pensions minister and partner at LCP, said while the figures mean pensioners could receive a boost of around £500 a year, there is still a blow awaiting them. He said: “The sting in the tail is that this will take the standard rate of the new state pension above the tax threshold. “The Government’s plans to address this point are a mess, and likely to benefit only a small fraction of pensioners. “They will also create unfairness between different groups of pensioners and between pensioners and low-paid workers, who do not qualify for any exemption.” That’s because of the five million people who receive the new state pension, more than four in five won’t qualify for the tax break. Around 1.8million of this group have other taxable income, such as private pensions or investment income, which means they are not solely dependent on the state pension. Jessica explains: “That means increasing numbers of pensioners with relatively small amounts of private provision could find themselves becoming taxpayers for the first time.” Around 1.1million receive too little new state pension to be dragged above the tax threshold in the next three years. A further 1million people in this group receive extra payments on top of their new state pension payments. Meanwhile, a further 290,000 are not based in the UK. What about the old state pension? No pensioners on the old state pension will benefit from the rule change this year Credit: Alamy Approximately 7.7 million pensioners on the old state pension also won’t qualify for the tax break. The old state pension is currently worth £9,614 a year and is paid to men born before April 6, 1951 or women born before April 6, 1953. But it is set to increase by around £374 a year to £9,989 a year. As a result, it is well below the £12,570 threshold at which you begin to pay income tax. Around 6.5 million people on the old state pension also get “additional” state pension, which tops up their income. If these payments drag their total income above the income tax threshold then they will need to pay tax. That’s because only people who rely on the state pension as their sole income, without top ups, will qualify for the tax break. As a result, a pensioner on the old state pension whose payments total the same as someone on the new state pension will have to pay tax. How will I pay the tax? Most pensioners will not need to file a self assessment tax return Credit: Getty Images If you receive a workplace or private pension and you need to pay tax on your earnings then you won’t need to do a tax return. When you started to take money from your pension pot your pension provider was given a PAYE tax code for you from the taxman. The code tells your pension provider how much income tax to take from your payments before you receive them. Sarah Coles, head of personal finance at AJ Bell, explains: “Once the state pension pays more than the personal allowance, that PAYE code will be adjusted so you pay any tax due on the state pension from your workplace or private pension income too.” Some retirees also file a tax return each year for example because they make money from renting out a room, do freelance work or earn too much interest on their savings. Sarah adds: “If you already do a tax return, you’ll declare your income on that and pay any tax due.” Comment now