From 6 April, millions of UK pensioners will see their State Pension rise, but the increase could also bring unexpected tax consequences. As reported by Birmingham Live, around 12 million retirees are now approaching or crossing the income tax threshold, triggering concerns over a growing “retirement tax” burden.
State Pension Increases Thanks to Triple Lock
The rise is part of the government’s Triple Lock mechanism, which ensures the State Pension increases in line with the highest of inflation, wage growth, or 2.5%. This year, the full new State Pension will reach £12,014, just shy of the current personal tax-free allowance of £12,570.
While the increase aims to help older citizens cope with living costs, Clare Moffat, pensions expert at Royal London, highlighted a potential issue:
“Around 12 million pensioners will receive more in their state pension from this weekend, bringing them perilously close to the amount that can be received without incurring tax liability.”
Tax Shock for Many Pensioners
The tax implications are expected to catch many off guard, especially those who are unaware that the State Pension is a taxable income. Research by Royal London shows that 21 million people aged 21–65 don’t know the State Pension is taxable.
Clare Moffat added:
“While it’s worth remembering that nearly half of pensioners don’t receive the full state pension, there are currently people who only receive the state pension and already pay tax on it.”
This includes those with delayed claims or larger additional entitlements, such as the Additional State Pension, which push their annual income above the threshold.
Impact on Private and Workplace Pensions
Those with additional income from defined benefit or defined contribution pensions could also see changes in their take-home pay. While defined benefit pensions offer fixed payments that cannot be adjusted, defined contribution pension holders may choose to adjust their drawdown amounts to manage tax exposure.
Moffat explained that individuals in drawdown might be able to minimise tax by reducing pension withdrawals or topping up income using tax-free ISAs.
“Strategic planning, through financial advice, on how best to withdraw pension funds would help reduce the overall tax burden,” she advised.
Growing Pressure on Fixed Incomes
The situation highlights the growing strain on older citizens living on fixed incomes. Even small increases in annual income can unintentionally tip pensioners into taxable brackets, reducing the actual benefit of annual upratings.
Experts are encouraging pensioners to review their income structures, particularly those with mixed sources of retirement income. Taking proactive steps now could help mitigate higher tax bills later in the year.
