Basic and New State Pension payments will increase next week by 10.1 per cent for some 12.6 million older people across the country, including around one million living in Scotland.
The uprating means that those on the full New State Pension will see payments increase from £185.15 to up to £203.85 each week and those on the Basic State Pension will see weekly payments rise from £141.85 to up to £156.20. It's important to be aware that the amount someone receives depends on the amount of National Insurance (NI) contributions they have made.
However, while the increase will help offset the ongoing cost of living crisis, it also means more older people may have to pay tax on their income. This is because someone with 35 years’ worth of NI contributions, on the Full New State Pension will receive £815.40 every four-week pay period, giving them an annual income of £10,600.20 - which leaves them just £1,969.80 of their annual Personal Allowance of £12,570.
Those in receipt of the Basic State Pension will see their payment rise to £156.20, which may be topped up further by the Additional State Pension.
However, new analysis from Standard Life, part of Phoenix Group highlights that increases will also take them closer to the tax-free Personal Allowance limit.
The freeing of the Personal Allowance at £12,570 since 2021/2022 means that the State Pension payment has grown from 74 per cent of the allowance to 84 per cent for 2023/24, meaning pensioners will need just £1,969.80 of income before they start paying income tax.
Dean Butler, Managing Director for Customer at Standard Life, said: “Pensioners are set to see a healthy boost to their incomes in a few days’ time as the State Pension amount passes £10,000 for many for the first time.
“However, given the substantial State Pension boost, it’s important to be aware of the implications this has in relation to the Personal Allowance which isn’t due to increase until April 2028. The Personal Allowance has remained flat in recent years and will gradually be bringing more and more people into the tax system as result.”
He explained that there are a few steps people with modest savings whose annual income is likely to be around the Personal Allowance limit can take.
While 25% of pension savings can be withdrawn tax free, the remainder can be taxed. For those incomes hovering around the Personal Allowance, it's worth ensuring they’re not taking bigger lump sums on which they might pay tax if they can be avoided.
If they do have any ISA savings these are not subject to income tax and could be a useful source of additional income.
Dean added: “An income at or just above the level of the Personal Allowance is below the Pension and Lifetime Savings Association (PLSA)’s estimate for a minimum standard of living in retirement and people in this situation might be struggling financially, even before any tax liability.”
State Pension and Income Tax
The MoneyHelper website explains that State Pension income is taxable but usually paid without any tax being deducted and reminds retirees that they no longer have to pay NI contributions after reaching State Pension age.
The amount of income tax you pay depends on your total annual income from all sources.
For example:
- earnings (including State Pension)
- profits from self-employment
- rental income
- other pensions you’re getting
- bank or building society interest
- income from your investments.
The guidance states: “You only pay Income Tax once your total annual income is above your Personal Allowance.
“If your total annual income is more than your Personal Allowance, you’re liable to pay Income Tax on the amount that exceeds the Personal Allowance.”
It adds that although tax isn’t deducted from the State Pension, it will therefore use up some of your tax-free personal allowance.
Full guidance on State Pension and tax can be found on the MoneyHelper website here.
To keep up to date with the latest State Pension news, join our Money Saving Scotland Facebook page here, follow us on Twitter @Record_Money, or subscribe to our newsletter which goes out Monday to Friday - sign up here.
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