State pensioners warned over hated tax as payments close to threshold | Personal Finance | Finance
State pensioners have been warned their payments are ‘perilously close’ to becoming subject to a tax bill everyone hates paying.
The annual rise in payments is lifting the state pension ever nearer to crossing the personal allowance threshold and becoming subject to income tax.
The personal allowance is currently £12,570 a year, while the full new state pension currently pays £221.20 a week, or £11,502.40 a year, only just over £2,000 away from the limit.
State pension payments will increase 4.1 percent in April in line with the triple lock, with the full new state pension increasing to £230.30 a week, or £11,975.60 a year.
Looking ahead to the April increase, Rachel Vahey, head of public policy at AJ Bell, said: “The state pension will be at a level perilously close to the frozen personal allowance and should overtake it in a couple of years if things continue, thanks to frozen tax thresholds.”
She said this looming change may force the Government to make changes to its state pension policy. Ms Vahey stated: “At that point something must surely give. But slowing the increase in state pension growth or unfreezing the personal allowance both seem unlikely.
“It could be that this fast-approaching crunch time means the Government will finally be forced to address the question of how much the state pension should really offer, at what age, and how it can increase payments sustainably each year.”
One option the Government could look at in its efforts to keep the state pension affordable is to increase the state pension age, which is currently 66 for both men and women.
This is increasing to 67 betwen 2026 and 2028 and then to 68 from 2044 to 2046. There were previous reports this second change could be brought forward, with the Government due to issue an update on this question in the first two years of this Parliament.
Many state pensioners will have been affected by losing the Winter Fuel Payment this year, which is worth £200 or £300.
The eligibility for the payment changed so it’s no longer a universal payment for people of state pension age, but you now have to be on a means-tested benefit, such as Pension Credit.
Ms Vahey commented: “Criticism of the decision to scrap the Winter Fuel Payment for all pensioners except those that claim Pension Credit still lingers.
“Government will hope this rise in Brits’ state pensions will publicly reinforce its commitment to the triple-lock, although some will still be reeling from the £200 most pensioners lost this winter.”
Those planning their state pension finances for 2025 may also want to note there is an important deadline with the turn of the tax year.
You can currently top up your National Insurance contributions towards your state pension over an extended period, as far back as the 2006/2007 tax year, rather than as far back as the usual six years. You can top up over this extended period until the end of the current tax year.
