The Daily Telegraph reported this week that an additional 900,000 pensioners will start paying tax on part of their State Pension for the first time from April, because of the freezing of the basic tax threshold since April 2021.
The threshold at which 20% tax becomes payable has remained at £12,570 per year for the past 3 years, and is planned to remain frozen for the next 5 years, so as the State Pension increases to keep pace with inflation of earnings growth, more of the pension increase will become taxable.
State Pensions rose by 10.1% in April 2023, and are due to rise by 8.5% from 8 April this year, and Civil Service pensions will rise by 6.7% from 8 April in line with the September CPI inflation figure.
The Government has been warned by former Pension Minister Baroness Ros Altmann: “Something is not working. We need to raise the tax threshold to try and ensure that people who are not living on generous, huge pensions don’t face the complexities involved in paying tax”.
CSPA Deputy General Secretary, David Luxton, commented:
“Whilst these pension increases are very welcome for many pensioners struggling with the cost of living, many will now find that the increases will take more of their pension further above the basic 20% personal tax threshold of £12,570. So even on a very modest Civil Service pension of around £4,000 a year, the 8.5% increase in the basic State Pension of £670 a year will be taxed at 20% taking £134 of that pension increase.”
“Had the personal tax allowance risen in line with inflation since 2021 it would have been £14,300 by April, leaving many pensioners not having to pay any tax on their pension”
The Chancellor is due to present his Spring Budget on 6 March.