State pension climbs 10.1% today and pensioners get instant tax bill

BBC Money Box experts explain increases to State Pension

Shortly after receiving a letter from the Department for Work & Pensions informing them of this year’s state pension increase, pensioners are receiving less welcome news.

One pensioner, Ian Blagden, 74, from Stevenage, told that HM Revenue & Customs was immediately on his case.

A mere two days after receiving the DWP letter, Ian received a letter from HMRC saying he owed more tax.

Many others will be receiving similar letters.

As the Express has warned, Chancellor Jeremy Hunt’s stealth tax raids are about to take a big chunk of this year’s state pension increase.

The state pension increases on the first Monday of the new tax year, which for 2023/24 year means today, April 10.

Millions are on course for a bumper increase, because the state pension triple lock has been reinstated.

This increases the state pension by either earnings, inflation or 2.5 percent, whichever is highest. September’s consumer price inflation figure of 10.1 percent will apply this year.

This will lift the full new state pension to a maximum of £10,600.20 a year, paid to those who have made the maximum 35 years of qualifying National Insurance contributions.

At the same time, the personal allowance, the threshold at which people start paying income tax, has been frozen at £12,570.

This means that pensioners only need to earn £1,969.80 a year on top of that, before they start paying income tax.

Ian Blagden has what he calls a “small company pension”, which is worth just a few thousand pounds a year.

HMRC informed him that his tax code has changed and it wants more money from him.

Ian said: “The headlines say pensioners are getting a 10.1 percent increase, but for many like me that won’t be the case.”

The DWP is giving with one hand while HMRC is taking with another, he added.

Making matters worse, inflation is still sky-high, rising by 10.4 percent in February. That means the state pension is still shrinking in real terms despite the increase.

Everyday essentials such as food and heating are rising at a much faster rate and Ian says he and many others will feel poorer in real terms despite the double-digit triple lock hike.

Older pensioners who retired before April 6, 2016 on the basic state pension, may also find themselves facing a shock tax bill.

This will rise to £8,121.20 a year for a single pensioner but many will see this topped up State Second Pension (S2P) and the state earnings-related pension scheme (Serps).

Once combined with any workplace or personal pension, many older pensioners will also find themselves paying more income tax to HMRC.

At least they won’t have to pay National Insurance contributions, as those over the state pension age don’t have to do so.

Yet it will still be a shock and the problem is set to intensify because the personal allowance has been frozen for seven years in total, all the way through to 2028.

So while the state pension increases, the threshold at which pensioners pay tax on their income will not.

“At the end of the day, I along with many others are going to be worse off,” Ian says.

Ian doesn’t know how much worse off yet, as the tax calculations are complex. This only adds to the uncertainty, he says.

Figures from Standard Life show that the state pension was worth 74 percent of £12,570 personal allowance in 2021/22 tax year.

That has now jumped to 84 percent.

As the state pension rises each year while the personal allowance is frozen, that percentage will continue to climb. This will drag pensioners with small amounts of extra income into the tax net.

The new state pension could even rise above the frozen personal allowance at one point.

If it rose at an average annual rate of five percent for the next four years, it would be worth £12,884.61.

That’s some way off, and anything could happen between now and then. Yet as Ian and many other pensioners are discovering, their income tax bills are increasing from today.

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