Could Pensioners Soon Be Paying Tax on Their State Pension?

The Department for Work and Pensions has released a statement in response to recent requests for an increase in the tax-free allowance for pensioners. Currently standing at £12,570, there have been calls for the allowance to be raised to £15,000 in order to exempt state pension from income tax. This request arises as state pension payments are expected to increase by 8.5% from April, potentially resulting in more pensioners falling into the taxable income bracket.

During discussions in Parliament, DUP MP Gavin Robinson proposed the idea of raising the tax-free threshold for pensioners to £15,000. In response on behalf of the Government, Financial Secretary to the Treasury, Nigel Huddleston, highlighted the Government’s dedication to ensuring that older individuals can maintain a dignified and respectful lifestyle. He also stressed that the current personal allowance is designed to prevent pensioners who rely solely on the state pension from being subject to income tax.

The Government’s response also acknowledged the existence of a petition with over 33,600 signatures advocating for the exemption of the state pension from income tax. However, they expressed reservations about the potential complexity of such a change and the lesser impact it might have on individuals earning below the higher rate threshold, while potentially benefiting those with higher earnings.

Wealth management group Quilter has cautioned that without an increase in the tax-free allowance, pensioners who receive at least a 4% pay increase over the next two years could find themselves liable for tax on their state pension. This could lead to a situation where pensioners end up owing a portion of their state pension to HMRC due to frozen allowances.

As of now, the full new state pension amounts to £10,600.20 per year, set to rise to £11,502.40 per year from April. Meanwhile, the full basic state pension is expected to increase from £156.20 to £169.50 per week. These increases may lead to more pensioners surpassing the income tax threshold, further underscoring the urgency of raising the tax-free allowance.

It is evident that this issue carries significant implications for the financial well-being of pensioners nationwide. Therefore, the Government will need to carefully assess the potential consequences of disregarding calls for a higher tax-free allowance for pensioners in order to ensure that they can lead comfortable and dignified lives in retirement.