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Millions of UK pensioners could soon see a portion of their state pension taxed for the first time, as frozen income tax thresholds and the triple lock system push more retirees above the £12,570 personal allowance.
Starting in April, the full new state pension will rise 4.1% to £12,016.75 per year, edging dangerously close to the taxable threshold. By 2027, it is projected to exceed the personal allowance, meaning pensioners could start paying 20% tax solely on their state pension income.
The Tax Trap for Pensioners
- Fiscal drag is pulling pensioners into tax brackets without tax thresholds adjusting for inflation.
- By 2027, retirees receiving the full state pension could owe £63 annually in tax.
- More pensioners are now paying tax than those under 30—with 8.1 million retirees taxed in 2023-24, projected to rise to 9.2 million by 2026.
Campaigners are urging the government to unfreeze tax thresholds to prevent retirees from losing more of their pension income. John O’Connell of the TaxPayer’s Alliance warns that without action, more pensioners on modest incomes will face tax burdens traditionally reserved for higher earners.
How Pensioners Can Reduce Tax Liability
- Flexible pension withdrawals: Spreading out private pension withdrawals to stay within lower tax brackets.
- Deferring the state pension: Delaying claims can increase payments by 5.8% per year deferred.
- Maximizing tax-free allowances: Utilizing ISAs and marriage tax allowances to protect more income.
With more pensioners set to be taxed in the coming years, proper financial planning will be crucial to minimizing tax burdens in retirement.
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