State Pension Increases and Tax Implications
As of April 2025, the full new state pension has risen by 4.1% to £11,973 annually. While this increase aims to support retirees against inflation, it brings many closer to the personal tax-free allowance, which remains frozen at £12,570 until at least 2028. Consequently, approximately 650,000 additional pensioners are expected to pay income tax this year, with projections indicating that nearly nine million could be affected by 2026 .
Understanding Fiscal Drag
Fiscal drag occurs when tax thresholds remain static while incomes rise, leading to a higher tax burden without changes in tax rates. In this context, the combination of increasing state pensions and frozen allowances means that more pensioners are liable for income tax, even if their real income hasn’t grown
Strategies for Pensioners
To mitigate the impact of these changes, pensioners might consider:
Utilizing ISAs: Investing in Individual Savings Accounts can provide tax-free income.
Adjusting Pension Withdrawals: Managing the timing and amount of private pension withdrawals may help stay below tax thresholds.GB News, Retirement Pasta, Rest Less+2
Claiming Pension Credit: Eligible low-income pensioners should explore Pension Credit to supplement their income.Rest Less Retirement Pasta GB News
Seeking Financial Advice: Consulting with financial advisors can provide personalized strategies to navigate tax liabilities.
Looking Ahead
The current trend suggests that more pensioners will face income tax liabilities in the coming years due to ongoing fiscal drag. Staying informed and proactive in financial planning is essential to manage these changes effectively
