State pensioners are receiving unexpected letters from HMRC after learning that their state pension income may be subject to taxation. Many retirees on the Department for Work and Pensions (DWP) state pension were unaware that the state pension is taxable income, as it is typically paid without any tax deducted at source.
The recent government commitment to maintaining the Triple Lock increase means that from next week, the full new state pension will be just under £30 below the personal allowance threshold. This change raises the likelihood that pensioners with additional income will face a tax liability.
Sarah Pennells, a consumer finance specialist at Royal London, explained, “It’s not surprising that around four in ten adults don’t know the state pension is taxable since payments are made without tax being taken off.” She stressed that with the April adjustment, understanding potential tax obligations is more important than ever.
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This means that state pensioners with modest additional earnings could find themselves pushed into paying tax. Research from Royal London reveals that approximately 68 percent of retired individuals who are no longer working pay tax on their pension income, with the average tax bill being around £4,500.
With the state pension age now at 66 and set to rise to 67 starting in April, many retirees are eager to claim their pension. Pennells advised, “If you’re considering deferring your State Pension, it’s important to assess whether this decision will benefit you. Although delaying payments can result in a higher future pension, you forgo payments while deferring, and it could take years to recoup the advantage.”
She also highlighted that surviving spouses or civil partners can only inherit additional pension payments if the original pensioner reached state pension age before April 6, 2016.