The state pension is set to rise next year due to the Triple Lock mechanism, which ensures annual increases based on the highest of wage growth, inflation, or 2.5%. Experts predict wage growth will be the determining factor, potentially leading to a £517 increase in the full new state pension, bringing it to £12,019 annually from April 6, 2025. However, this rise may push pensioners into paying income tax for the first time.
The current tax-free threshold stands at £12,570, meaning pensioners with no other income would narrowly avoid taxation in 2025. But a further estimated rise of £517 in 2026 would exceed the threshold, subjecting them to a 20% tax rate on any amount above it. Sarah Coles, head of personal finance at Hargreaves Lansdown, warns that frozen tax thresholds are causing the state pension to approach tax-paying territory.
Pensioners nearing tax threshold
She emphasizes the importance of supplementing the state pension with personal savings to ensure a decent retirement income. Data from Hargreaves Lansdown’s Savings and Resilience Barometer reveals only 38% of households are on track for a moderate retirement income.
Coles advises, “Small actions like upping your contributions when you get a pay rise or a new job can make a significant difference.”
As pensioners face fiscal challenges and insufficient savings, experts urge them to plan ahead and take proactive measures to bolster their retirement income. The Triple Lock provides a safety net, but it may not be enough to ensure a comfortable retirement for all, especially with ongoing fiscal policies and economic conditions. Labour has pledged to keep tax thresholds frozen until 2028, which might need revision to prevent pensioners from being taxed on their state pensions.
As the situation evolves, pensioners and financial planners will need to stay informed and adjust their plans accordingly to accommodate these changes in the taxation landscape.
