Warning for 420,000 people on the state pension being hit with tax bill for the first time – can you avoid it?

Scottish Sun

4 hours ago

We reveal how you make the most of your cash to avoid paying income tax below
TAXING TIMES Warning for 420,000 people on the state pension being hit with tax bill for the first time – can you avoid it?
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HUNDREDS of thousands of state pensioners are set to be stung with a tax bill for the first time.
Fresh data from HMRC shows 8.7million people of state pension age or older will pay income tax on their retirement income in 2025/26.
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State pensioners are facing paying income tax due to fiscal drag
Credit: Getty
This is a 420,000 rise compared to the previous financial year and a hike of 1.85million from 10 years ago (2015/16).
The blow comes due to a combination of a rising state pension, under the Triple Lock, and frozen income tax thresholds - known as fiscal drag.
The full new state pension is currently worth £11,973 a year while the personal allowance is £12,570, with the threshold frozen until 2028.
The full new state pension amount on its own is not yet enough to breach the allowance.
However, older people receiving income from other avenues like a private pension or job on top of a state pension can end up going over the threshold and having to pay tax.
David Brooks, head of policy at leading independent consultancy Broadstone, said: "We would expect a growing number of pensioners to be liable for income tax as the country's demographic changes due to our ageing population.
'Fiscal drag, however, is also bringing hundreds of thousands more pensioners into paying income tax bracket every year as the frozen personal allowance thresholds combines with the Triple Lock-protected state pension.
'While perhaps personally frustrating for many pensioners, it reflects the nature of inflation linked occupational pensions and a Triple-locked state pension that continue to rise."
It's not just people receiving income through a state pension and other streams who are set to pay income tax either.
As the state pension rises under the Triple Lock, some relying solely on this could end up paying tax.
What are the different types of pensions?
The Triple Lock ensures the state pension goes up by whatever is highest out of inflation, 2.5% or wages.
Previous forecasts by Deutsche Bank predict the Triple Lock will rise by £600 in April 2026 to £12,631.
This would see someone on the full new state pension breach the personal allowance for the first time and having to pay tax.
In May 2024, then Chancellor Jeremy Hunt said the income tax personal allowance would be frozen at £12,570 until 2028.
The freeze was first put in place in 2021.
In her first Budget in October that year, Chancellor Rachel Reeves had been widely expected to extend the freeze beyond 2028.
The Sun asked the Treasury to comment.
How to avoid paying income tax on your state pension
There are a few tricks you can use to lessen the chances of being taxed on your income if you're a state pensioner.
The first is by withdrawing from a private or workplace pension tactically.
It's tempting to take out your whole private or workplace pension when you reach retirement and put it into a savings account.
But do this and you'll end up paying income tax on any sitting in taxable accounts.
Instead, you can actually take out 25% of the value of the pension tax-free.
You can either do this as a lump sum or in smaller gradual amounts to top up your state pension without being taxed on it.
A second way is by making the most of your ISAs as withdrawals from these types of accounts aren't subject to income tax.
For example, if you withdrew 4% from a £100,000 ISA pot, your take home pay would be £4,000.
How does the state pension work?
AT the moment the current state pension is paid to both men and women from age 66 - but it's due to rise to 67 by 2028 and 68 by 2046.
The state pension is a recurring payment from the government most Brits start getting when they reach State Pension age.
But not everyone gets the same amount, and you are awarded depending on your National Insurance record.
For most pensioners, it forms only part of their retirement income, as they could have other pots from a workplace pension, earning and savings.
The new state pension is based on people's National Insurance records.
Workers must have 35 qualifying years of National Insurance to get the maximum amount of the new state pension.
You earn National Insurance qualifying years through work, or by getting credits, for instance when you are looking after children and claiming child benefit.
If you have gaps, you can top up your record by paying in voluntary National Insurance contributions.
To get the old, full basic state pension, you will need 30 years of contributions or credits.
You will need at least 10 years on your NI record to get any state pension.
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