More state pensioners will owe tax to HMRC from April and many don’t even realise it, financial experts have warned.
Contrary to popular belief, the DWP state pension payments have always been taxable income, it’s just that those who only get the state pension and have no other income would not in the past normally earn enough to break past the Personal Allowance threshold, currently set at £12,570 per year, apart from in some older, now defunct, pension schemes.
But many state pensioners do in fact have other income, such as savings interest, money from a side hustle, property rental income or from being still in work.
In almost any scenario in which pensioners get other income, that income, and the DWP state pension payments, will be subject to tax.
Rachel Reeves last year announced that state pensioners with no other income will not have to pay tax on their DWP payments alone if the triple lock takes the state pension above the £12,570 threshold, which it’s expected to do from April 2027. However, this would not apply to those with additional income from other sources.
From this April, the state pension is increasing again, by 4.8%, thanks to the latest triple lock increase, set to take effect from next month.
That rise will mean new state pensioners with a full National Insurance record will be just £22 away from the Personal Allowance threshold, receiving roughly £12,547.60 from the state pension in a single tax year, which is £22.40 away from the tax-free limit.
According to research from Royal London, nearly seven in 10 retired people who are no longer working still paid tax on their pension income in the past year, which is most state pensioners, and 12% of state pensioners were caught off guard by an unexpected tax bill.
*** Ensure our latest personal finance headlines always appear at the top of your Google Search by making us a Preferred Source. Click here to activate or add us as Preferred Source in your Google search settings. ***
Sarah Pennells, consumer finance specialist at Royal London, said: “The fact that approximately 4 in 10 adults do not know the state pension is taxable is not surprising as it’s paid without tax being taken off.”
She also pointed out that thanks to older pension schemes like SERPS, many have been paying tax on their pension for a while adding: “Some pensioners who built up a larger state pension under the old system, thanks to the State Earnings Related Pension Scheme (SERPS), will already be paying tax even if they have no other income in retirement.”
