State pensioners may be looking forward to the amount they receive increasing in April but this brings them ever closer to paying tax on their payments.
With the 8.5 percent increase in April, the full new state pension is increasing from £203.85 a week to £221.20 a week, or £11,500 a year.
This is just £1,000 under the personal allowance of £12,570 a year, after which pensioners will have to pay income tax on their payments.
Wealth management group Quilter calculated if pensioners get at least a four percent pay increase over the next two years, they will be paying tax on their payments, under the current rules.
Roddy Munro, tax and pensions specialist at Quilter, said: “We are soon set to be in the perverse situation where pensioners might have to start paying back their state pension to HMRC because of frozen allowances.
“Given that state pensions will shortly eradicate someone’s personal allowance, any private pension provision other than the tax-free cash lump sum will therefore become taxable at a client’s highest marginal rate.
“For many that could mean big tax bills depending on how much they drawdown. In addition, with the maximum amount of tax-free cash available now capped at £268,275 this adds in another layer of complexity if strong investment returns are achieved as this can only now ever lead to increasing the amount of someone’s pension that becomes fully taxable.”
Under the current rules, the full new state pension takes up 91.5 percent of a state pensioner’s personal allowances. This proportion has increased over the years – in 2016/2017, with a full new state pension of £8,094 and a personal allowance at £11,000, the state pension took up just 73.5 percent of a person’s allowance.
Mr Munro said: “Pensioners are often worst hit by frozen tax allowances because they typically will be getting their income from a number of different investments and therefore lean heavily on capital gains tax and dividend allowances to help create a retirement income in addition to their pension.
“However, the government has made it very difficult to avert being taxed very heavily on these types of investments. It is now incredibly important for people to look across the spectrum of financial products out there that provide tax efficiency and use them in the right way and at the right time to try to prevent their income being eroded by tax.
“Seeking professional financial advice can help someone make the most of their finances as current fiscal policy now mandates a different approach to financial planning.”
