The upcoming increase in the state pension will be welcomed by many pensioners who are struggling to keep pace with the rising cost of living.
Due to the triple lock policy that protects pensions, there may be a £ 500-a-year increase to the state pension on the horizon.
However, fiscal drag makes the news less positive than it would otherwise be.
Why might a state pension increase result in paying Income Tax?
While the exact amount that the state pension will increase is yet to be fully determined, the latest figures from the Office of National Statistics (ONS) suggest that the increase will be substantial.
The new flat-rate state pension, for those who reached state pension age after April 2016, is expected to increase to £241.05 a week.
This increase will see the figure increase to £12,534.60 a year which is a rise of £561.60 compared with now.
The news is less positive for those receiving the old basic state pension, those who reached state pension age before April 2016, as it is only expected to go up to £184.75 a week.
That will take it to £9,607 a year, a rise of £431.60 compared with now, so still a notable increase but not as generous as for those on the flat-rate state pension.
Those on the flat-rate state pension may soon find themselves facing down Income Tax, if they have not already crossed the threshold.
Those who know their tax thresholds may have already spotted that the new flat-rate state pension is only £35.40 below the personal allowance of £12,570.
Any income past that figure is subject to Income Tax and it is predicted that a rising state pension will soon cross the threshold.
Any pensioner who receives additional income, such as through an employer or private pension, will likely already be paying Income Tax.
Fiscal drag will likely see more pensioners crossing the threshold in the coming years, so it might be time to consider how best to mitigate an increasing tax bill.
What can be done to manage rising tax bills?
For pensioners who only receive the flat-rate state pension, it is possible that they believed their tax-paying days were largely behind them.
Instead, they now need to consider what can be done to stay below the personal threshold if such a thing is possible.
The personal allowance threshold remains frozen until 2028 so fiscal drag is a real concern.
To combat the rise, anyone taking the flat-rate state pension should be careful if they are also getting any additional income.
As there is not much that can be done to avoid the personal allowance threshold, it is perhaps more important for pensioners to be aware of their tax obligations.
Similarly, those who are paying more into private pension pots during their working life could find themselves reconsidering if their pensioners end up subject to Income Tax anyway.
Pensions planning is particularly fraught at the moment with the changes to Inheritance Tax, so now might be a good time to seek professional financial advice.
We can help you manage your personal tax obligations as well as raise awareness of the issues that could impact those you love.
We understand that everyone faces unique challenges when it comes to structuring their finances and managing their tax bills, so be sure to talk to us directly to get tailored advice.
Don’t wait for tax bills to erode your retirement plans. Speak to our team today!
