The government faces calls to alter tax allowances to reduce the likelihood of state pensioners being taxed. Liberal Democrat MP Ben Maguire has urged Chancellor Rachel Reeves to look at the advantages of increasing the tax allowance for individuals over the State Pension age to £15,000.
Currently, it’s set to stay fixed at £12,570 until 2028/29. Critics argue that without action, more state pensioners will be subject to tax since the state pension nearly matches the tax allowance – and tipping over the threshold would incur tax liabilities.
However, it appears the government has no intention of revising their stance until 2028. In a written response, Treasury Minister James Murray MP stated: “The Government is committed to keeping taxes as low as possible for pensioners while ensuring fiscal responsibility, which is why it is not extending the freeze on personal tax thresholds that was implemented by the previous government, and is instead allowing them to rise with inflation from April 2028.”
Moreover, he added: “At Autumn Budget, the Government announced that the basic and new State Pension will increase by 4.1 per cent from April 2025. This means those on a full new State Pension will receive an additional £470 a year.”
The full New State Pension, currently valued at £11,502 for the 2024/25 tax year and set to rise to £11,973 in 2025/26, leaves taxpayers near the threshold with little room before crossing into taxable income levels. Those solely receiving the full New State Pension won’t be subject to income tax, reports the Daily Record.
However, older citizens with additional income from employment or private or workplace pensions may need to pay tax. For most, this tax is automatically deducted through PAYE on employment and private pensions.
Those who don’t have their tax automatically deducted will receive a tax bill from HMRC the following summer, due by January of the next year. There’s been significant speculation about the number of pensioners who will be taxed, but currently, nearly 8 million (62%) of the UK’s 12.9 million State Pensioners already pay some tax in retirement.
With auto-enrolment in workplaces now in its 13th year, more people will benefit from increased retirement income and likely pay tax, typically deducted from their private pension. Any tax paid in retirement is based on the amount of income earned above the threshold, not the total additional income.
For instance, if someone has a total annual income of £13,000, they will pay tax on £430 – the amount above the £12,570 threshold. The Department for Work and Pensions (DWP) is set to release the full list of updated State Pension and benefit payments. As of now, only the New and Basic State Pension rates have been confirmed, with the additional elements expected to rise by 1.7%.
Full New State Pension
- Weekly payment: £230.25 (from £221.20)
- Four-weekly payment: £921 (from £884.80)
- Annual amount: £11,973 (from £11,502)
Full Basic State Pension
- Weekly payment: £176.45 (from £169.50)
- Four-weekly payment: £705.80 (from £678)
- Annual amount: £9,175 (from £8,814)
To check your own future State Pension payments, use the online forecasting tool on GOV. UK.