Pensioners to be hit with new tax trap as state pensions pass £10,000

Pensioners could be clobbered by a new tax trap when the State Pension rises to £10,600 a year from Thursday. After a Daily Express campaign to hike payments in line with record inflation, the Chancellor was persuaded to raise the pension by 10.1 percent as dictated by the triple lock guarantee on pension increases.

It boosts weekly income to £203.85 for 12.5 million recipients of the State Pension. But yesterday there were warnings that millions will be snared in tax because of ­frozen payment thresholds.

The personal allowance has stayed at £12,570 since 2021/2022 meaning that the State Pension payment has grown from 74 percent of the allowance to 84 percent today.

This means pensioners will need just £1,969 of income before they start paying income tax. In 2019/20, the single-tier State Pension was equivalent to 70 percent of the personal allowance, meaning people had £3,732 of headroom.

Dean Butler, of insurers Standard Life, said: “Given the substantial State Pension boost, it’s important to be aware of the implications this has to the personal allowance which isn’t due to increase until April 2028.

“The personal allowance has remained flat in recent years and will gradually be bringing more and more people into the tax system.” Retired households already pay £4,961 a year in direct taxes – adding up to a collective total of £57.22billion.

But the Personal Allowance freeze will see pensioners’ tax bill rise or they may face paying tax for the first time. Around 7.7 million taxpayers are aged over 65 including those who still work.

The number paying tax has increased 43 percent in the past decade and around 770,000 pay higher rate tax.

Hrishi Kulkarni, managing director of iSIPP pensions, said: “The number of over-65s paying income tax has been steadily rising over the past 10 years but April this year is likely to see another sharp increase.

“Frozen tax allowances and the rise in the State Pension will mean many ­people with private pensions will face increased tax bills with some paying tax for the first time.

“It is important people budget for the potential tax bills, particularly given the cost-of-living squeeze and also that, where possible, they maximise tax-free savings.”

From April 6, the single-tier State Pension will pay £203.85 per week or £10,600.20 per year while those getting the basic State Pension will see it rise to £8,122 annually and £156.20 weekly, which could be topped up by the Additional State Pension.

The rise is determined by the triple lock, which dictates the State Pension will go up every year either in line with inflation, wage growth, or 2.5 percent, whichever is greater.

But Becky O’Connor, of PensionBee, said: “In an ­environment of rapidly falling inflation, such increases may be harder to justify for a government trying to make the State Pension affordable.”