STATE pension claimants could be caught by a surprise tax trap following the recent payment increases.
On April 10 this year the state pension rose from £185.15 a week to £203.85.
State pension claimants could be lumped with a surprise tax billPA
That’s the equivalent of £10,600 a year.
While the increase is great news for pensioners, it could leave many of them paying tax.
This is because of personal allowance which is the amount you can earn each year tax-free.
Personal allowance is currently frozen at £12,570 a year, so anyone earning below this will not need to pay tax.
This means that if state pension claimants earn just £1,970 more in come a year they’ll have to pay income tax.
So while the state pension rise will be a boost for some, it’s important to check any other avenues of income you have to figure out if you’ll be lumped with a tax bill.
Under the triple lock, all state pension payments have to rise by whatever is highest: inflation, wages or 2.5%.
Jon Greer, head of retirement policy at Quilter, said: “While the significant 10.1% uplift in the state pension this year helps pensioners keep up with inflation, it now accounts for a hefty 84% of their £12,570 tax-free personal allowance from this month.
“ Currently around seven million pensioners pay income tax and that’s set to grow significantly as the personal allowance remains frozen.
“If you have a very low income, you should ensure you have checked your eligibility for government benefits and you can use online government calculators to see what you can claim.”
He added: “If you are concerned about managing pension withdrawals and how much tax you will pay, it is worth seeking advice or speaking to Pension Wise.”
What is my personal allowance?
The personal allowance is the amount you can earn each year tax-free.
It can change from one year to the next and is set by the government.
In the current tax year – which runs from April 6 2022 to April 5 2023 – the figure is £12,570.
However, this amount may be bigger or smaller if you claim certain allowances.
The marriage allowance is a tax break where one partner in a married couple can transfer some of their unused personal allowance to another.
And people with sight issues can get the blind person’s allowance, which increases this tax-free amount.
How much is the state pension in 2023?
State Pension payments were increased on April 10 this year.
The full rate of the new State Pension has risen from £185.15 a week to £203.85.
This equates to £10,608 in total over a year.
This is what the state pays those who reach state pension age after April 6, 2016.
The full basic State Pension under the old system is now £156.20 per week in 2023/24.
This is paid under the old pension system and is for those who retired before April 6, 2016.
There is also the additional state pension under the old system, which is an extra payment on top of the basic state pension some are entitled to.
How do I calculate tax?
If you earn £12,570 or less, you currently pay no income tax.
On earnings between £12,570 and up to £50,270, you pay the basic income tax rate of 20%.
Wages of £50,271 and above are taxed at the higher rate of 40%.
And the additional rate of income tax, which applies to earnings above £150,000, is 45%.
The thresholds for income tax generally rise each year so that people can earn more without paying more tax.
But the thresholds are now frozen until 2028.
Do you have a money problem that needs sorting? Get in touch by emailing [email protected]