Martin Lewis has warned state pensioners that their payments could be subject to tax, potentially leading to unexpected bills from HMRC. On his BBC podcast, the financial journalist explained the key rules governing the state pension, including how National Insurance contributions build entitlement and how the Department for Work and Pensions benefit is treated for tax purposes.
State Pension Is Taxable Income
Lewis emphasised that state pension payments are taxable. He said: "Worth noting, that payment is taxable. Now, when something is taxable, it doesn't mean it's automatically taxed. It means it counts towards your tax thresholds." The crucial threshold is the personal allowance, currently set at £12,570 per year. Individuals can earn up to this amount without paying income tax.
Lewis explained: "You can earn £12,570 a year, most people, without paying any tax on it. So if you only had the full new state pension at the moment, you wouldn't pay any tax on it." The full new state pension pays £241.30 per week, equating to roughly £12,500 annually—just below the personal allowance. However, he warned that the moment pensioners have other taxable income, the taxman may come knocking.
Additional Income Triggers Tax Liability
Lewis stated: "But if you had any other taxable income, say from working or private pensions... then in total, anything above the threshold would be taxed." This means that pensioners with earnings from part-time work, private pensions, or other sources could face a tax bill if their combined income exceeds £12,570.
Building State Pension Entitlement
Entitlement to the state pension is built through National Insurance contributions. Lewis clarified that this is not a savings pot: "You're not building up a pot of money for it. What happens with the state pension is every year that you work and earn over a certain amount, or if you have childcare responsibilities, or if you're on certain benefits, you get a National Insurance credit." He likened these credits to "tokens" that go into a "National Insurance piggy bank."
To qualify for any state pension, individuals need a minimum of 10 years of contributions. For the full new state pension, 35 years of contributions are required. Lewis noted: "If you have 35 years of National Insurance credits, so you've worked 35 years say, or more, you will get the full state pension." However, he cautioned that 35 years is a "rough" guideline and should be considered "an idea rather than a fixed rule."
State Pension Alone Is Not Enough
Lewis highlighted that £12,500 per year is rarely sufficient for a comfortable retirement. He said: "Even so, £12,500 a year does not, for most people, fulfill the requirement of what they will need to live in retirement. Because most people would want roughly around two-thirds of what they were getting when they were working when they retire, and £12,500 isn't that."
To bridge the gap, he strongly advised building private or workplace pensions: "Which is why you're going to want to be looking at getting a private or workplace pension, as well. And the rule with those is the earlier you start, the better."
