NEARLY half a million retirees will face a surprise tax bill because of a bumper state pension payment rise.
Millions are expected to get a huge 8.5% boost to their pension payments next April thanks to the triple lock.
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However, this increase combined with the freeze on the personal allowance threshold means that large numbers of pensioners will be dragged into paying income tax.
Analysis by Lane Clark & Peacock (LCP) has shown that hundreds of thousands of these pensioners have no PAYE income (such as earnings or private pensions) which can be used to collect the tax which they owe.
As a result, these pensioners are set to get tax demands the year after they have received their pension and will need to set money aside now for when it arrives.
Estimates suggest that 400,000 state pensioners will be affected by the personal allowance threshold freeze.
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The personal allowance is the amount you can earn each year tax-free.
It’s currently frozen at £12,570 a year, so anyone earning below this will not need to pay tax and those earning above will be liable to pay up.
For pensioners who have a state pension and a private pension, the Government will collect any tax due through the ‘tax code’ applied to the private pension.
But growing numbers of pensioners will be over the tax threshold based purely on a state pension, and there is no automatic way of collecting the tax that they owe, because state pensions are paid in full – before the deduction of tax.
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Steve Webb, partner at LCP said: “Millions of pensioners have been dragged into the tax net for the first time in recent years, primarily because of the multi-year freeze on tax thresholds.
“Many are now at risk of an unexpected letter from HMRC asking for tax they may not have realised was due.
“Any pensioner with a pension next year over £242 per week will have tax to pay, and if they do not have a private pension through which the tax can be collected, they may need to set some money aside for an unwelcome tax demand.”
However, affected households won’t be expected to fill in a self-assessment tax return.
In cases of this sort, HMRC will operate a system known as “simple assessment”.
Under this ‘simple assessment’, the Department for Work and Pensions (DWP) will notify HMRC at the end of a tax year how much state pension each individual has received.
If this takes the individual over the income tax threshold it will then send out a tax bill in the post at the end of the next tax year.
How will state pension payments change next year?
The state pension will rise in April 2024 and under the triple lock system, these payments are expected to go up by 8.5%.
The triple lock sees state pension rise in line with whatever is highest out of: wages for May to July, 2.5% or September’s inflation figures.
Growth in employees’ average total pay was 8.5% in the three months to July and inflation remained 6.7% in September.
So payments will increase with wages as they were higher than this year’s September inflation rate.
The exact amount payments will rise by will be confirmed by the government next month.
If they do increase by 8.5%, payments of the new state pension will rise from £203.85 a week to £221.20 a week in April.
This equates to £11,534.01 in total over the next financial year.
Payments for the full basic state pension will rise from £156.20 a week to £169.50 a week.
This equates to £8,838.22 in total over the next financial year.
When is income tax paid?
If you earn £12,570 or less, you currently pay no income tax.
This is known as the personal allowance.
It can change from one year to the next and is set by the government but the thresholds are currently frozen until 2028.
On earnings between £12,570 and up to £50,270, you pay the basic income tax rate of 20%.
Wages of £50,271 and above are taxed at the higher rate of 40%.
And the additional rate of income tax, which applies to earnings above £150,000, is 45%.
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However, you might have your own personal allowance and it could be bigger or smaller depending on your own circumstances.
For example, people with sight issues can get the blind person’s allowance, which increases this tax-free amount.
