Do you pay tax on state pension? You might have to soon

The question of whether you pay tax on state pension payments is becoming very topical. This is because of a combination of factors that risk pushing large numbers of pensioners into income tax.

Currently, state pensions are protected by the ‘triple lock’. This means that the state pension rises each year in line with the highest of:

• September’s Consumer Price Index (CPI) inflation rate
• Earnings growth
• 2.5%

After enjoying years of relatively low inflation, the CPI has rocketed since early 2021. In February 2021 inflation stood at 0.4%. By October 2022 it hit a peak of 11.1%.

The figures that determine the state pension for 2024/25 were released late 2023 and now stands at 11,502 pa. This year the increase (for 2024/25) is is based on Earnings growth of £8.5% being the highest of the three criteria.

Threshold for paying tax on state pension

While an increased pension is good news for many, the bad news is that it could mean thousands of people will have to pay tax.

The reason for this is that state pension income is taxable if your total income exceeds the income tax personal allowance. This currently stands at £12,570. That’s just £1,068 above the state pension (2024/25).

What other income is taxable?

If you get income from other sources, this is generally taxable. For example, you might have income from:

• Earnings
• Self-employment
• Rental income (such as from a buy-to-let property)
• Other pensions
• Investment income (including dividends)
• Bank or building society interest

As you can see, it’s not too difficult to exceed the personal allowance if you have a full state pension.

How do I pay tax on my state pension?

If you exceed your personal allowance, you’ll have to pay income tax. You don’t have to pay National Insurance unless you’re self-employed and pay Class 4 contributions.

There are two ways you can pay tax.

1. If you have income from employment or another pension, HMRC will get your employer or pension provider to apply a relevant tax code. They will then pay any income tax on your behalf.
2. If you’re self-employed or have other income (such as from a rental property), you’ll need to fill in a Self-Assessment Tax Return each year.

Will the income tax personal threshold rise?

In the Spring Budget 2021, the then Chancellor Rishi Sunak announced that the personal threshold would remain frozen until the end of tax year 2025/26. Unless inflation comes down significantly, this means there’s a risk that all people with full state pensions will face income tax on anything over £12,570. This seems quite likely to happen in the 2026/27 tax year unless the allowance threshold is raised between now and then.

This possibility has angered many pensioners. Indeed, there was a petition to stop UK pensioners paying income tax on their state pension. This closed in September 2023 with 22,903 signatures.

Can you help me with tax and pensions?

If you are a pensioner and you pay tax, we can certainly help you with a range of services. These range from preparing your Self-Assessment Tax Return to providing you with tax planning advice. If you intend to pass on property, money and other assets to the next generation, we can also help you prepare your Will and help you with Inheritance Tax planning.