POT LUCK
Warning for 637,500 on state pension over surprise tax bill from this month
Plus we reveal what you can do to reduce your tax bill AND earn easy cash
HUNDREDS of thousands of state pensioners are set to be hit with a stealth tax from this month.
An estimated 637,500 Brits will be pushed into paying income tax in 2024 to 2025.
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This is up from last year's figures and based on analysis by the House of Commons Library.
The personal allowance threshold, which is the rate at which people start paying tax, has been frozen at £12,570 since April 2021.
The government freezes tax thresholds as a way to raise extra cash without directly increasing taxes.
As wages or income from pensions rises each year, more people are dragged into paying tax, or into higher tax brackets.
READ MORE ON PENSIONS
Pensioners will pay tax if they've got additional income on top of the state pension.
The latest Department for Work and Pensions figures show that 12.7million Britons now receive the state pension.
Payments increased by another 8.5% earlier this month, taking the full flat-rate state pension to £11,500 a year.
This means that with the personal allowance having been frozen at £12,570, the state pension is taking up the lion’s share of that tax-free allowance.
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According to the Institute for Fiscal Studies, 8.5million people over the age of 65 are now paying income tax, up from roughly 4.9million in 2010.
What are the different types of pensions?
From the start of the frozen tax bands in April 2021, 1.2million more pensioners have been dragged into the income tax net in the past two years alone.
By 2027-28, 1.6million additional pensioners will be paying income tax, compared to if the personal allowance had been increased in line with inflation.
Pensions expert Steve Webb has crunched the numbers for The Sun and found that an additional 637,500 pensioners will be paying income tax this tax year compared to last.
This amounts to a new total of over nine million over 65s who will be paying income tax.
Steve, partner at pension consultants LCP and former pensions minister said: "Yet another freeze in tax thresholds combined with another hike in state pension rates will have brought hundreds of thousands more pensioners into the tax net.
"When we see the figures for 2024/25 I strongly expect to see that more than nine million over 65s will have to pay income tax."
This is drawn from an estimation based on the latest available figures from the House of Commons Library - which only go up to 2023/24.
Although we don’t have the figures yet for 2024/25, it’s possible to make a pretty reasonable estimate, Steve explained.
We know that between 2022/23 and 2023/24 the numbers paying income tax went up by 770,000.
This was when the state pension rose by 10.1%, so Steve calculated that you could say that every 1% on the state pension brings roughly 75,000 people over age 65 into tax.
Given that we also know that between 2023/24 and 2024/25, state pension went up by 8.5%, applying that rule of thumb you’d get a rise of 637,500 and a new total of around 9.14million, according to Steve.
Of course, it's important to bear in mind that these are just estimations and we won't know for sure how many were dragged into paying income tax in 2024/25 until next year.
It's also good to note that some parts of the state pension such as SERPS went up by less at 6.7% instead.
Why is this happening and is there anything I can do to avoid it?
High inflation rates mean more people in work are getting pay rises to try and keep pace with rising prices.
However, with income tax bands frozen, it means many are being pushed into the next tax bracket.
Laura Suter, director of personal finance at AJ Bell, previously told The Sun: "Pensioners looking to reduce their tax bill need to think about how they can maximise their tax-free income.
"For example, any withdrawals made from their ISAs will be free of any tax. so they can use that pot of money to boost their income without impacting their tax bill."
An ISA is a type of savings account in which you can save up to £20,00 a year tax-free.
Laura also suggested that couples can organise their finances so they ensure they are each making use of their tax-free allowances, which might involve moving money or assets between themselves.
We also spoke to Helen Morrisey, head of retirement analysis at Hargreaves Lansdown, who added that pensioners might want to use some of their pension to top up their income.
She said: "Most people can access 25% of their pension as a tax-free lump sum so they may decide to use this to top up their income without pushing up their tax bill."
However, she also warned that pensioners below the personal allowance are going to find it increasingly difficult to avoid paying income tax in the coming years.
The finance expert added: "A full new state pension hits just over £11,500 per year and even relatively modest 3.5% annual increases would see people pushed over the threshold by the time the threshold freeze ends."
Other ways you can save on tax
Tax-free childcare
Families can claim up to £2,000 a year tax-free to go towards childcare costs, as well as 30 hours free childcare, if you are eligible for both.
To be eligible, both parents must work at least 16 hours a week and earn the minimum wage or above.
Visit gov.uk/tax-free-childcare to get started.
Savings allowance
Low earners taking home between £12,570 and £17,570 a year could earn up to £5,000 in interest on their savings without having to pay a penny in tax.
This situation is most likely to apply to pensioners who have a lot of cash in savings but are no longer earning a wage or are reliant on the state pension.
If you earn more than this, you can still make £1,000 in interest tax-free.
Marriage allowance
Couples on a low income who have tied the knot could save £252 a year with the marriage allowance.
The allowance allows one partner to share 10% of their £12,570 tax-free personal allowance with the other to reduce their tax bill, assuming they have it spare.
Claims can be backdated for up to four years, saving a taxpayer £1,260 in total.
You can claim it on the Government website.
Trading allowance
Savvy sellers could earn up to £1,000 a year by flogging their wares or services with the trading allowance.
The allowance could save basic-rate taxpayers up to £200 a year in tax.
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Rent out your home or driveway
Anyone with a driveway to spare or going away for a few weeks could earn up to £1,000 tax-free.
You can rent your home on Airbnb while you are on holiday or let out your driveway to commuters for a bit of extra cash, and as long as you earn below the £1,000 threshold, you don't need to pay a penny in tax.
What are the different types of pensions?
WE round-up the main types of pension and how they differ:
- Personal pension or self-invested personal pension (SIPP) - This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- Workplace pension - The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won't be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%. - Final salary pension - This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you'll be paid a set amount each year upon retiring. It's often referred to as a gold-plated pension or a defined benefit (DB) pension. But they're not typically offered by employers anymore.
- New state pension - This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you'll need 35 years of National Insurance contributions to get this. You also need at least ten years' worth to qualify for anything at all.
- Basic state pension - If you reach the state pension age on or before April 2016, you'll get the basic state pension. The full amount is £156.20 per week and you'll need 30 years of National Insurance contributions to get this. If you have the basic state pension you may also get a top-up from what's known as the additional or second state pension. Those who have built up National Insurance contributions under both the basic and new state pensions will get a combination of both schemes.
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