State pensioners can avoid an HMRC tax bill by delaying their state pension, according to financial experts. The state pension is already taxed, and anyone earning more than £12,570 in a single tax year is liable to pay 20% income tax on every £1 above that amount, with state pension payments counting towards that threshold.
Tax exemption and eligibility
Former Chancellor Rachel Reeves announced a special tax exemption for state pensioners, which new Prime Minister Andy Burnham and his new Chancellor John Healey will keep in place. However, this exemption only applies to state pensioners who have no other income aside from their DWP payments. Those with additional income, such as savings interest, wages from work, or investment income, will not be eligible for the exemption.
A pensioner with no other income or savings interest in a single tax year will not earn enough to pay tax. But with the Triple Lock forecast to take pensions to over £12,570 next year, pensioners will be liable for tax on their state pension income as soon as they earn anything on top, which loses their exemption.
Benefits of deferring
For those likely to face tax in retirement, financial experts are urging pensioners to consider delaying their state pension. This has two benefits: you won't lose any money to tax, and you can boost the amount you get paid when you do eventually take the pension.
Ocean Finance's Fiona Peake explains: "Nearly 18 million more people are expected to be paying income tax by 2027, and almost half of them will be over 60. With the State Pension rising each year but the personal allowance stuck at £12,570, more older people are being dragged into the tax system."
She added: "The frustrating thing is, this is happening quietly. It's not a tax rise on paper, but it feels like one in practice. Many older people will just receive a letter [from the HMRC] or notice a tax code change, with no idea why they're suddenly being taxed on their pension income. It's especially tough for those on a fixed income who are already watching every penny. And with inflation expected to rise again this year, it's yet another blow to pensioners' pockets."
Deferral advice and tax code checks
"If you can afford to, deferring your State Pension could pay off. For every year you delay, it goes up by nearly 5.8%, and that higher amount is paid for life. It's a personal decision, but if your other income is low in the meantime, it could be a smart way to increase your future pension without triggering tax straight away," Peake said.
Some pensioners, perhaps if they are still working and have an income, will defer if they are likely to drop a tax bracket later when they actually retire. The state pension counts as taxable income, so add it to your regular income and it's taxed at your highest tax rate, whether that's 20%, 40% or 45%. If you don't need the extra income now, and you know you'll drop a tax bracket once you stop working, it's worth considering deferring your state pension and claiming it once you're in that lower tax bracket.
Fiona Peake also urged those who do get a tax bill to check their HMRC letter to make sure it's right. She added: "HMRC doesn't always get tax codes right, especially if you've got more than one income. A wrong code could mean you're paying too much. It's a good idea to check your code every year, especially after changes like retiring or starting to take a private pension."
