HM Revenue and Customs (HMRC) has issued a warning to state pensioners about how the upcoming 4.1 per cent increase in April 2025 will affect their tax codes and personal allowances.
The tax authority explained that as state pension payments rise, personal allowances for pensioners will be reduced accordingly.
This is because state pension income is taxable but paid without tax being deducted at source. Some taxpayers have already noticed their tax codes changing to 60L for the 2025/26 tax year.
The change has caused confusion among pensioners who don’t understand why their tax-free allowance is being reduced when their pension is increasing.
A taxpayer recently contacted HMRC via social media after noticing their tax code had suddenly changed to 60L. They explained: “I live on a pension, my income hasn’t changed in years. Any ideas please?”
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State pension claimants could be hit with a tax bill
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The concerned individual revealed their tax-free allowance had dropped significantly from £1,085 to £607, which they described as “a big difference”.
HMRC advised the taxpayer to check their personal tax account for a breakdown of the code. The personal allowance enables individuals to earn up to £12,570 annually without paying income tax.
They expressed confusion about why a pension increase would lower their personal allowance. HMRC replied: “The state pension has increased for the new 25/26 tax year, which would reduce your personal allowance.”
“The state pension is taxable but is paid to you directly, so there’s no tax deducted at that point.
“The personal allowance is reduced in line with the state pension amount, so the tax code that operates against your private pension deducts the tax due against both the private and state pensions.”
From April 2025, state pension payments will increase by 4.1 per cent, marking the start of the 2025/2026 tax year. As a result, the full new state pension will be raised from £221.20 to £230.25 per week.
On an annual basis, the full new state pension will reach £11,973. This amount is alarmingly close to the personal allowance threshold of £12,570.
With less than £600 leeway, many pensioners receiving the full state pension are approaching the point where their state pension alone will use up their entire personal allowance.
Once this threshold is exceeded, the additional income becomes subject to income tax. This explains why tax codes are being adjusted downward for the new tax year.
Income from the state pension counts as taxable earnings, however it is paid without tax deducted at source.
This means any income tax owed is usually paid by private pension firms, reducing other pension income before it reaches the recipient.
A person’s tax code tells their pension provider how much tax needs to be paid. After reaching state pension age, most people won’t need to pay National Insurance contributions.
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The exception is self-employed individuals, who must continue paying until the end of the tax year in which they reach pension age.
For those concerned about gaps in their National Insurance (NI) record, an important deadline is approaching this April.
Typically, individuals can only top up NI contributions for the past six years. However, currently there’s an extended opportunity to make contributions dating back to the 2006/2007 tax year.
This provision ends at the conclusion of this tax year. Most people need 30 years of NI contributions to receive the full basic state pension. For the full new state pension, 35 years of contributions are typically required.