State pensioners have been given an update on a new £13,036 tax threshold, with an expert explaining that all sources of income – including dividends and savings interest – can count towards it. Those who rely solely on the full new state pension are set to exceed the personal tax allowance for the first time, following official earnings data suggesting some could see an increase of nearly £500 a year from April.
Should earnings growth be confirmed at 3.9%, experts believe this could add £9.40 a week to the full new state pension, pushing it to £250.70 – an annual rise of just under £500, bringing it to approximately £13,036. This would place it above the £12,570 personal tax threshold, beyond which people begin paying 20% on their income.
New pension tax allowance
To avoid this, Chancellor John Healey made an announcement at last week’s budget that people over state pension age will have a new threshold of £13,036. However, this is throwing up some strange results – including a very high tax rate on some income – and more detail has emerged on how it will work.
BBC Radio 4’s Moneybox show was told of the updates. Presenter Paul Lewis said: “Some low-income pensioners will pay 53% tax on some of their income following new rules designed to reduce tax bills.”
Mr Healey said in the Budget speech: “For pensioners, I’m delivering the new pension tax allowance, so that pensioners with income of up to the value of the full new state pension will not pay income tax.”
How the allowance works
Antonia Stokes, a senior manager at the Low Incomes Tax Reform Group, explained: “It was originally floated by Rachel Reeves at last year’s Budget, and it was announced as being an ‘administrative easement’ for certain state pensioners who, as a result of the triple lock to the state pension rates, were due to be tipped over into having to pay tax on their pension from April 2027.
“Bearing in mind the frozen personal tax allowance. As such this pension tax allowance has been developed in order to remove the need for these people to pay tax. And the solution that has been come up with is that it will apply to anyone who is over state pension age, and the availability of this allowance is based on what their total income is.
“So if they have income of just £13,037 from April 2027 that is the rate of the expected new state pensions standard taxable amount for the year. They would not have to pay any tax on their income.”
Mr Lewis said: “So it’s like a discount, a rebate, if you like of £94. So your tax is wiped out if your income is up to £13,037.” Ms Stokes said: “It works as a discount at the bottom of the tax calculation. It’s not an extra personal allowance, it’s just something that’s knocked off at the bottom.”
Income sources and the 53% rate
On the types of income it applies to, as it originally was said to only apply to the new state pension, Ms Stokes explained: “It’s quite pleasing really that this proposal as announced now means it can apply to any sources of income that that particular state pensioner has. So it can be savings, dividends, rental income; anything as long as their total income is up to that level.”
“An important point on the savings and dividends side of things is that even if that savings income, for example, is below a person’s personal savings allowance of £1,000, it still needs to be factored in to calculating the total income. I think that’s something that many people will be surprised about.”
In terms of the 53% rate, this has been explained by former Pensions Minister Steve Webb. He said the maximum value of the break is around £94 in 2027/28. For those just above this income level, the tax break will be reduced at a rate of £1 taken away for every £3 of income above £13,037. For those on £13,319 or above, the tax break will therefore be reduced to zero.
However, this means that for pensioners in the range £13,037 to £13,319, they will face an effective tax rate of 53%. This is made up of 20% basic rate income tax plus loss of tax break at £1 per £3 of extra income or 33%.
Mr Webb said: “The Chancellor has created a bizarre 53% income tax rate for around 200,000 low income pensioners. They will find that each £100 of annual private pension they have built up above the rate of the new state pension will add £53 to their income tax bill. We are used to seeing high rates of income tax like this for top earners but not for those on very modest incomes. Yet again, complexity has been introduced to the tax system to fix a short-term problem but with no long-term solution in mind.”
