Many pensioners may face a potential tax pitfall as the State Pension escalates and Income Tax bands remain fixed. Though they will see a substantial increase in their income next year, as the State Pension is expected to rise by 8.5% next April — even after a 10.1% increase this April. What is causing this and how can you minimise tax risk? To find out, read on.
This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice.
Why is this happening?
It seems like the government’s ‘triple lock’ pension mechanism is to blame for this situation. The triple lock guarantees that the benefit increases in line with wage growth, inflation, or 2.5%, whichever is higher.
As a result, this means a full new State Pension could increase from £10,600 this tax year to just over £11,500 in the 2024/25 tax year, pending a confirmation from the Prime Minister.
But this also means that as the State Pension grows, pensioners may face potential tax implications. Your overall income’s tax-free portion, your Income Tax personal allowances, has not changed, remaining at £12,570 a year. You might be in a situation where you could have a higher amount tax-free, such as if all your income is savings income and you’ll get less tax-free income from other sources. Because of this, your tax code on your pension or annuity could be subject to change, which means you would need to report other income to HMRC for the first time.
Use your allowances
While it’s always a good idea to fully utilise all of your allowances, in retirement, it’s even more essential. Anything that can help put more money into your pocket like the personal savings allowance — which allows basic rate taxpayers to earn £1,000 and higher rate taxpayers to earn £500 worth of interest in 2023/24 before paying tax — or the dividend allowance — which allows you to receive £1,000 tax-free from shares this tax year.
ISAs provide protection and income
By using a Cash Individual Savings Account (ISA) any interest you earn is tax-efficient so it’s a good way to shelter your savings from tax. As you only have a £20,000 annual allowance, you will need to carefully consider how much money you allot to each different kind of ISA, as others might be more beneficial at certain times.
For example, a Stocks & Shares ISA could be more useful to avoid tax on income or gains from shares or other assets. They are also a fantastic way to invest your money long-term. ISAs allow you the freedom to withdraw money easily whenever you want without having to pay tax. Plus, proceeds are free of Income Tax and Capital Gains Tax. In retirement, they are a great way to supplement income without worrying about taxes.
Professional help to maximise results
When planning for your retirement with tax implications in mind, there are many factors that come into play. But retirement planning is essential so you can secure your financial future. Professional advice will ensure the retirement lifestyle you want while also maximising tax breaks. We’re here to help you manage your finances, so get in contact today to get started on working toward your future.