Chancellor confirms state pension to rise by 4.8% in line with earnings, putting pensioners within £23 of the basic rate threshold.
This rise means the full state pension, which it should be noted is not paid to all pensioners due to various changes over the years, will amount to £12,547 a year from April 2026 due to triple lock, up from the current £11,973 a year.
This brings it very close to the basic rate tax threshold of £12,570, which has been frozen since 2021. There will only be a £23 cushion before income tax kicks in, almost inevitable the next time pensions rise.
Rachel Reeves is claiming up to a £30bn fiscal black hole and the talk is she plans to extend the freeze on thresholds to 2029/2030, leaving HMRC with a massive problem to consider how it will collect tax from every pensioner in receipt of the full state pension, forcing them all to complete a self-assessment tax return every year.
From 2027/2028, even those just on full state pension will face tax liability with HMRC facing a whole new tranche of taxpayers to collect from, unless the government introduces taxation at source from the state pension.
Currently, there is no facility to deduct tax direct from state pensions, with income tax on overall retirement incomes being deducted from private and workplace pensions.
Those with solely a state pension could face receiving letters from the taxman demanding they pay the tax due which might create anxiety amongst many vulnerable pensioners.
The cost of HMRC sending out tax demands and administering payments could wipe out much of the increased tax due. However, if, as expected, the Budget includes an extended personal allowance freeze, the tax due will rise year on year. This will be a tricky issue for Rachel Reeves to negotiate.
Peter Nichols – Tax Director BFN Accounts & Tax
www.bfnaccounts.com