Retired individuals are slated to experience a notable 8.5% boost in their State Pension, elevating it to £221.20 weekly for the fiscal year 2024/25. While this augmentation is likely to be welcomed by many, it brings the total new State Pension perilously near the threshold of the Personal Allowance. Consequently, certain retirees might encounter the prospect of facing Income Tax responsibilities for the first time or even being nudged into a higher tax bracket.
The full new State Pension is £221.20 a week in 2024/25
In accordance with the triple lock policy, the State Pension undergoes an annual rise determined by the highest among three designated measures for each tax year:
- Average wage growth
- Inflation rate
- 2.5%
The triple lock mechanism plays a pivotal role in preserving the purchasing power of pensioners. Its absence would mean the State Pension income remains static, leading to a gradual decline in purchasing power against the increasing prices of goods and services. Considering the likelihood of a lengthy retirement period and prolonged reliance on State Pension benefits, the triple lock stands as a crucial safeguard, guaranteeing retirees can uphold their standard of living throughout their later years.
For 2024/25, the State Pension saw an 8.5% rise (based on the average wage growth measure), reaching £221.20 per week or £11,502 annually.
To be entitled to the new full State Pension, you need at least 35 qualifying years of National Insurance contributions or credits. If you have fewer qualifying years, you’ll usually receive a portion of the full State Pension but you still benefit from the triple lock.
If you attained State Pension Age before 6 April 2016, your State Pension is calculated according to the previous regulations in effect at that time. If you were contracted out of the Additional State Pension, you may receive a lower amount.
You can use the government’s State Pension forecast if you’d like to understand how much you could receive through the State Pension and when you can claim it.
Frozen allowances could mean your tax bill increases in retirement
The government has decided to maintain crucial Income Tax thresholds at their 2021/22 levels until April 2028. Consequently, it is anticipated that a larger number of individuals will be subject to Income Tax in the upcoming years as wages and the value of benefits, such as the State Pension increase.
Indeed, the Office for Budget Responsibility (OBR) predicts the freeze will lead to 3.2 million new taxpayers and 2.1 million new higher-rate taxpayers by 2027/28. It’s not just an issue for workers – it could affect retirees too.
In the tax year 2024/25, the Personal Allowance, which represents the income threshold before tax liability is incurred, stands at £12,570. This figure is anticipated to remain unchanged until 2028.
With the recent increase under the triple lock, if you’re entitled to the full State Pension amount, a significant portion of your Personal Allowance could be consumed. This means that you would only need to receive approximately £90 per month from other income sources before becoming liable for Income Tax. Consequently, individuals who have not paid Income Tax since retiring may now find themselves unexpectedly facing a tax bill.
Similarly, the tax thresholds for paying the higher and additional rate of Income Tax are frozen until 2028. So, even if your income from other sources doesn’t increase, you could find yourself in a higher tax bracket due to the State Pension rise.
For 2024/25, the Income Tax bands are:
How to manage your tax liability in retirement
When planning your tax strategy in retirement, it’s crucial to begin by monitoring your income closely. Are you approaching any thresholds that might result in a larger tax bill than anticipated?
You may find yourself managing various income sources during retirement, including the State Pension, annuities, or flexible withdrawals from your pension. Each of these sources needs to be carefully considered when planning your finances.
Once you’ve set out your income, you can start to create a tax strategy that suits your needs.
As an example, it’s typically possible to withdraw up to 25% of your pension as a tax-free lump sum, with a maximum cap of £268,275 for most individuals in the 2024/25 tax year. This amount can be spread across multiple withdrawals, providing a convenient method for accessing significant sums without triggering additional tax liabilities. However, any lump sum withdrawals beyond the tax-free allowance would usually be considered as taxable income when combined with other sources, potentially leading to tax obligations.
As a retiree, you may have control over your income sources and could adjust them to reduce your tax liability. For example, if you take an income from your pension using flexi-access drawdown, you might choose to lower the amount so you remain below an Income Tax threshold.
You might also opt to supplement your income from other tax-efficient sources, such as an ISA. An ISA provides a tax-efficient method for saving and investing, allowing you to make withdrawals to cover your daily expenses without raising your tax liability.
Contact us to talk about how to improve your tax efficiency in retirement
If you’d like to understand what steps you could take to improve tax efficiency in retirement, we could help. We’ll take the time to understand your goals, lifestyle, and assets and then work with you to create a retirement plan that’s tailored to you. Please contact us to arrange a meeting.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
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