Rising State Pensions and the Impact on Retirees
In the coming years, millions of retirees in the UK may find themselves facing income tax bills on their state pensions. This shift is primarily due to the triple lock mechanism, which ensures that state pension payments increase by the highest of inflation, average earnings growth, or 2.5 per cent. As a result, the full new state pension, currently just under £12,000 a year, will surpass the £12,570 personal tax threshold.
This development has sparked considerable debate, with Chancellor Rachel Reeves suggesting that those relying solely on the state pension will be exempt from income tax. However, many retirees are already experiencing this situation. Alan Perkins, a 71-year-old retiree, is one such individual.
A Personal Struggle with Taxation
Alan, who retired in 2016, receives a “protected payment” that brings his annual state pension to around £16,000. Until last year, he was unaware that he was being taxed because he was still working part-time. He assumed the tax he paid was for his job, not his pension.
After losing his part-time job at a recycling centre, Alan began receiving letters from HMRC stating that he owed hundreds of pounds in taxes. This came as a shock to him, describing it as “a bit of a gut punch.” He now faces an annual tax bill of just under £700, which is expected to rise as his pension increases. This financial pressure has led him to seek more part-time work to supplement his income.
“I initially thought the tax demand was a mistake,” Alan explains. After clarifying with HMRC, he realized he did owe the tax. However, he believes the government does not fully understand the situation of people like him, who are effectively repaying part of their pension through taxes.
The Role of SERPS in Alan’s Pension
Alan’s large state pension is a result of his participation in the State Earnings-Related Pension Scheme (SERPS), which operated from 1978 to 2002. This scheme provided an additional pension on top of the basic state pension. When the new state pension was introduced for those retiring after 2016, individuals like Alan were able to lock in their larger payments.
Alan recalls that he worked extensive overtime to pay off a mortgage with a 15% interest rate. This hard work contributed to his substantial pension. However, he is frustrated that frozen tax allowances are forcing him to pay taxes on his pension.
“At the moment, I am now looking for a job, just so that I can afford to pay the tax on my state pension. This cannot be right, surely?” he questions.
Government Policies and Public Reaction
In last week’s Budget, Chancellor Reeves decided to extend the freeze on the salary threshold at which income tax payments of 20% kick in until 2031. While Alan understands the need for the government to raise funds for public services, he feels the tax burden is not being correctly targeted.
“They’re not aiming it at the right people. There’s some people you think, ‘how the hell have they got so much?’ but we’re sort of the easy target. I don’t begrudge people who have more money, but they should be paying the appropriate amount of tax,” he says.
Alan also acknowledges that pensioners are not the only ones affected by tax increases. He points out that while the minimum wage was raised in the Budget, much of that increase will be offset by higher taxes.
Despite his frustrations, Alan shows some understanding of the government’s position. “The grief Reeves was getting, I wouldn’t want that job for any money,” he says.
Future Implications and Government Commitments
The £12,570 income threshold at which people start paying income tax has been frozen since 2022. As state pensions continue to rise, retirees receiving only the full new state pension will start owing income tax on their pensions within the next two years.
Calculations suggest that by the 2029/30 tax year, those receiving the full state pension will have a taxable amount of £13,570.85, meaning they could owe £200 in tax. Reeves has assured consumer champion Martin Lewis that those relying solely on the new state pension will not have to pay tax during this Parliament.
She stated: “If you just have a state pension, and you don’t have any other type of pension, we are not going to make you fill in a tax return, and I make that commitment for this Parliament.”
It is understood that the government will exempt people on both the “basic” and “new” state pension, but those who already pay tax due to extra state pension income through SERPS may still face tax obligations.