The Office for National Statistics has confirmed that pay – including bonuses – rose by 8.5% in the three months to July.
This figure is likely to mean a similar percentage increase to the state pension in April 2024, as per the ‘triple lock’ policy.
If the Government go ahead with an 8.5% rise, the basic state pension will increase by £13.30 per week, and £691.90 annually – totalling £8,814 for the year.
Those who reached state pension age after April 2016, and so are receiving the new flat-rate, will receive £17.35 more a week (£902.20 annually), taking their total state pension for the year to £11,502.
What is the pensions triple lock?
The pensions triple lock system is a policy under which the state pension increases each April, in line with whichever of the following three measures is highest:
- Inflation, as measured by the Consumer Prices Index (CPI);
- the average increase in wages across the UK; or,
- 2.5%
The policy is designed to ensure that that value of the state pension was not overtaken by the cost of living or, otherwise, the general populations average income.
Will I need to pay Income Tax?
Figures from HM Revenue & Customs (HMRC) show that the number of retirees paying income tax has risen in the most recent tax year, and it’s likely that we could see the number increase again should the 8.5% rise happen.
Each individual is entitled to the Personal Allowance each year, tax-free, which currently sits at £12,570 and is frozen until April 2028.
Clearly, those receiving the flat-rate state pension will have little more than £1,000 left to play with when the increase is accounted for.
Therefore, they will need to be aware of any other sources of income, including private pensions or annuities, that they have and whether this takes them over the tax-free threshold.
Once yearly income exceeds £12,570, 20% income tax is charged on everything up to £50,270. On everything above £50,270, up to £125,140, 40% is charged and 45% on anything above £125,140.
If you are employed or have income from another pension besides the state pension, you will typically pay what you owe via your tax code – i.e., your employer or pension provider will pay the tax on your behalf before.
If you are self-employed, or have other sources of income (i.e., income from a rental property) in addition to receiving your state pension, it is likely that you will need to complete a Self-Assessment Tax Return.
If it is not possible for HMRC to collect the tax you owe via PAYE, you may be required to submit a Self-Assessment or HMRC may send you a Simple Assessment – i.e., they will tell you what you owe, without you needing to file a tax return.
Tax overpayments on pension withdrawals reach £56 million
In the second quarter of 2023, overpayments on pension tax in the UK reached £56 million.
This was an increase of nearly £8 million from the first quarter of the year, according to HM Revenue & Customs (HMRC), and is almost double the £33.7 million collected in the same period the previous year.
During this quarter, approximately 16,000 reclaim forms were processed, with an average reclaim amounting to £3,551. This is the second highest figure since the introduction of the pensions freedoms in 2015.
Over the past eight years, people aged 55 and over who have been overtaxed on their early pension withdrawals have reclaimed almost £1.1 billion.
The need for taxpayers to reclaim overpayments has arisen because people withdrawing from their pension pots early have typically been charged emergency tax, usually significantly above the amount that is ultimately owed.
The figures suggest that an increasing number of over-55s are using their pension freedoms, with some commentators suggesting that this is a result of the cost-of-living crisis.
How can George Hay help?
If you need support with understanding your income tax liabilities, with preparing a Self-Assessment Tax Return, or you are concerned that you have paid too much tax on pension withdrawals in the past, contact us today.
