State Pension UK: amount increase forecast news may bring unwelcome annual tax shocks - 5 ways to avoid bills
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Millions of retirees could see their income taxed sooner than expected 💷
- State Pension rises could push retirees over the tax-free threshold by 2027
- Frozen tax allowances mean millions may face unexpected income tax bills
- Spreading pension withdrawals and using ISAs can help reduce tax
- Contributions to private pensions or marriage allowance transfers can cut liabilities
- Free guidance is available via Pension Wise, MoneyHelper, or independent advisers
Millions of UK pensioners could soon face unexpected income tax bills, thanks to a combination of rising State Pensions and frozen tax thresholds.
But while the news might sound alarming, there are practical ways to reduce or even avoid paying more tax, and understanding the changes now could save you a lot of stress - and money - later.
The State Pension is set to rise next April under the Government’s “triple lock” policy, which guarantees annual increases based on the highest of three figures: September inflation, July earnings growth, or 2.5%.
The exact figure won’t be known until October, when the latest inflation statistics are released, but current forecasts suggest a rise of around 4.7%, pushing the full State Pension from £230.25 per week to £241.05.
Annually, that’s £12,535 - just £35 shy of the current £12,570 tax-free personal allowance. But while rising pensions are welcome news for retirees, frozen tax thresholds could easily tip total earnings over the threshold.
By 2027, experts warn, the State Pension alone could surpass the personal allowance, making tax bills unavoidable for a growing number of pensioners.
Former pensions minister Sir Steve Webb calls this situation a “creeping injustice,” noting that millions of pensioners who previously didn’t pay income tax could suddenly find themselves caught in the system.
The government has frozen tax thresholds until 2028, and there are no current plans to exempt State Pensioners, meaning the situation could continue to worsen.s
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What pensioners can do
The good news is that there are several strategies to minimise your tax liability. While HMRC will automatically deduct any tax owed from your pension income or send a straightforward bill, taking proactive steps can make a big difference.
1. Spread tax-free pension withdrawals
When you retire, you can withdraw up to 25% of your pension pot tax-free. Any amounts above that are taxable and could push you into a higher tax bracket. Instead of withdrawing large sums in one go, consider spreading withdrawals over several years.
For instance, you could take a small, 25% portion of the tax-free lump sum each year. Combining this approach with income from your State Pension and tax-free ISAs could keep taxable withdrawals below the higher-rate threshold.
Start by calculating your total annual income from all sources, then withdraw only what keeps you below the personal allowance.
2. Avoid emergency tax pitfalls
If HMRC doesn’t have the correct information, it might place you on an emergency tax code, temporarily charging more tax than necessary. One simple fix: withdraw £1 from your pension first.
This triggers HMRC to issue the correct tax code before you make further withdrawals, ensuring you’re taxed accurately. Check with your pension provider to make sure small withdrawals are allowed.
3. Use ISAs strategically
ISAs remain one of the most tax-efficient ways to draw income in retirement; all ISA withdrawals are tax-free and do not count towards your taxable income.
If your pension income edges close to the personal allowance, topping up with ISA withdrawals can provide extra cash without increasing your tax bill. For those seeking to avoid tax entirely, relying on the State Pension and ISAs alone may be a viable option.
4. Make pension contributions even after retirement
If you’re still working after reaching State Pension age, contributing to a private pension can reduce your taxable income. You can pay in up to your full earnings (capped at £60,000 per year), which may pull you into a lower tax bracket.
For those taking flexible income from pensions, the limit is £10,000. For example, if your earnings plus State Pension total £21,973, contributing your salary to a pension could eliminate any tax liability.
5. Consider the marriage allowance
Married couples or civil partners may save tax through the marriage allowance, which allows one partner to transfer up to £1,260 of their personal allowance to the other, and can reduce tax by up to £252 per year.
To qualify, the transferor must earn less than £12,570, and the recipient less than £50,270. Eligibility can be checked using the government’s marriage allowance calculator on GOV.UK.
Getting professional guidance
For tailored advice, over-50s can speak with Pension Wise, while anyone can access free guidance through MoneyHelper.
Independent financial advisers, searchable via unbiased.co.uk, can help craft a personalised strategy to minimise tax while maximising income.
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