State pensioners face 'unexpected bill' next year as shock tax raid to hit payments

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Analysts are warning retirees that state pension payments alone will become liable for tax as soon as next year

State pensioners are being urged to "check your tax code" as soon possible to make sure they are not slapped with "unexpected tax bills in April".

Analysts are sounding the alarm that full new state pension payments alone are likely to become liable for tax for the tax man alone due to fiscal drag.

This phenomenon occurs when tax thresholds are frozen over a period of time when either inflation or wages are rising, resulting in Britons being pulled into higher HM Revenue and Customs (HMRC) brackets.

As it stands, the full amount someone can receive from the state pension comes to £12, 547.60 a year if they have 35 years of National Insurance contributions under their belt.

This is just the £12,570 tax-free personal allowance, which is the amount people starting paying income tax to HMRC, with the threshold frozen until 2028.

Unlike other benefits from the Department for Work and Pensions (DWP0, the state pension payment rate is guaranteed to rise every year thanks to the triple lock.

Under the triple lock, the retirement benefit's payment rate increases every year by the highest of either inflation, wage growth or 2.5 per cent; whichever is highest.

As a result of this payment uprating mechanism, the state pension alone is set to surpass the tax-free personal allowance for the first time, which means vulnerable retirees may need to pay more to HMRC.

Des Cooney, a retirement planning specialist at Axis Financial Consultants, said: "With the full new state pension at £12,547.60 and the personal allowance frozen at £12,570 until at least 2028, the arithmetic is stark.

"A single above-inflation uprating could push pensioners with no other income into a tax liability for the first time.

"Anyone relying solely on the state pension should review whether they hold any additional income sources, even small occupational pensions or savings interest, that could tip them over the threshold once that gap closes.

"The practical step right now is to check your tax code and ensure HMRC has an accurate picture of all your income, so no unexpected bills are arriving after April."

Last month, Prime Minister Andy Burnham indicated he would ensure vulnerable older people would not need to pay tax on their state pensions alone.

Morgan Vine, the director of Policy and Influencing at Independent Age, shared: "Recommitting to exempting the state pension from income tax is a welcome signal that the new Prime Minister is listening to the concerns of older people on low incomes.

"However, questions remain about how the policy will be implemented across a complex pensions system where one solution does not fit all.

"Different versions of the state pension mean some older people receiving a lower state pension and a small private pension would be dragged into the tax system, while others receiving only the State Pension will be exempt, despite the amount they receive being largely the same."