State pensioners are being warned that they could owe Income Tax to HMRC from this month if they earn more than £597.
That’s because from April 6, the state pension went up by another 4.1% thanks to the Triple Lock, which automatically uprates state pension payouts by either inflation, wage growth or a flat 2.5%. Because wage growth was 4.1% this year, that’s the amount pensions went up by. It means that the state pension is now £230.25 per week, or £11,973 per year for someone on the full new state pension with maximum National Insurance year contributions.
It means that pensioners will be just £597 away from the Personal Allowance threshold of £12,570. Every £1 earned over £12,570 is taxed at 20% (up to £50,270 where it goes up to 40%). So pensioners earning just £598 on top of their state pension will start paying some Income Tax to HMRC.
Earnings doesn’t just mean working, it could be income from a private workplace pension, or from letting out a second property.
The Low Incomes Tax Reform Group wants the government to warn pensioners when this may happen.
It said: “We think that DWP and HMRC should work together to ensure that pensioners are warned about possibly needing to pay tax on their state pension in future. This should include setting out how the tax will be collected and the likely tax liability.
“Some words of warning could, for example, be included with the state pension notification letters that DWP send out each spring in advance of the April pension increases.”
Money expert Martin Lewis, though, has stressed that paying tax on some of your income as a pensioner will not leave you worse off. This is because our tax system is ‘marginal’, and you will almost always end up with more money in your pocket if you earn more.
Martin Lewis was asked a question about the tax threshold on his latest show on March 4. He was asked: “Explain to me why any pensioner would want to increase their pension? You will be taxed 20% over £12,570, which means you’ll be worse off and you’ll be asked to pay more in, you’d then have your benefits stopped if you’re below the limit and that takes you below the limit and that takes you over the limit even by 10p.”
Martin then said: “Let me split that into two. Without being rude, on the first bit you’re talking nonsense.
“Okay, look, tax in this country is marginal. You only pay 20% on the amount above the threshold. The state pension has always been taxable if you have other income, it counts as taxable income. So look, let’s say you add £1,000 a year to what you earn and that £1,000 is above the threshold. Yes it’s taxed so you only get £800 of it.”
He said on the most recent series of The Martin Lewis Money Show Live on ITV1: “Tax is marginal, you always want to earn more, you always receive more if you earn more.”
He stressed that the other aspect could cost you money if, for example, you spent money buying back a missing National Insurance year to boost your pension pot, when you could have used Pension Credit for free.
He added: “The other one isn’t – for those on very low incomes if you may be eligible for pension credit and you don’t have any other income, the pension credit effectively tops you up to the full state pension anyway so if you’re gonna buy years to top you up to the full state pension it is possible that you would have simply got it via pension credit anyway.”