From next week, the full state pension will increase by £905.30 per year to £11,542, which works out at £221.20 each week.
A basic state pension, based on your previous National Insurance contributions, will amount to £8,844 per year, or £169.50 per week.
However, the new tax year 2024/25 doesn’t mean there will be any changes to the tax-free personal allowance for pensioners, which will remain frozen at £12,570 and is expected to stay at that level until April 2028.
Clare Moffat, pensions expert at Royal London, believes that, with the rise being “within a whisker” of the personal allowance of £12,570, there could be a sting in the tail of the increases.
Pension rise ‘will push more income into taxable territory’
Moffat said: “If someone’s income exceeds their personal allowance, which is not too difficult if they’re also receiving another pension every month, they will have tax to pay. And what many people don’t know is that, although tax isn’t deducted from the state pension, it forms part of their taxable income, and the tax will be taken from their other (workplace or personal) pension.
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“Retirees in a defined contribution pension and in drawdown can minimise the amount of tax payable. That’s because the income level can be altered to keep drawdown income below the threshold.”
Moffat added: “Those in defined benefit schemes, where a fixed amount of pension is paid every month, like public sector schemes, will often increase in April too. This, alongside the state pension rise, will push more income into taxable territory.”
Inheritance tax freezes but capital gains tax halved
Elsewhere, the inheritance tax threshold will also stay at £325,000 until April 2028, as it was this tax year. But, the dividend tax-free allowance will be sliced in half from £1,000 to £500, which is the same change in the threshold for capital gains tax.
Capital gains tax, the threshold for the tax paid on profit from sales of an asset (property, shares, etc.) that has increased in value, will also be halved, dropping from £6,000 to £3,000.
The triple lock mechanism guarantees the state pension rises each year by the largest amount of:
- Average earnings growth
- The rate of inflation
- Or by 2.5%
While the increase due to the scheme will force some of the 12 million pension recipients into a new tax code, Becky O’Connor, the director of public affairs at PensionBee, thinks the news will be a “huge relief” for millions who rely on the retirement payments.
Scepticism remains after WASPI report
O’Connor said: “While lower than last year’s increase, which saw the state pension increase by 10.1% in line with inflation, many pensioners receiving a full state pension will now only require a small amount of extra income – from a personal or workplace pension, or from part-time earnings being dragged into the tax net.”
But with a report finding the Department for Work and Pensions (DWP) is at fault for failing to inform women born in the 1950s about the change in retirement age, scepticism remains over the Government’s pension plans.
O’Connor added: “PensionBee’s research found that having a decent state pension remains a key component of how confident people feel about their future.
“Yet, despite the Government maintaining the triple lock commitment and a [meaningful/substantial] state pension rise, distrust in the Government remains a top three reason for negative pension sentiment among over-55s.”
