HMRC has issued a clarification on state pension rules, confirming that some claimants will face higher tax bills due to the increasing state pension age. The tax authority released an update on July 19, including a social media post and an explainer video, to help people understand their options when working while drawing a pension.
Key Changes to State Pension Tax Rules
The guidance addresses two common questions. First, it confirms that individuals can work while receiving their state pension, a private or workplace pension, or both. Many people choose this option, and the tax rules are straightforward. Second, it states that workers stop paying National Insurance (NI) once they reach state pension age, even if they continue working. Employed individuals stop automatically, while self-employed people stop from the next tax year.
However, a key change to state pension rules means some people will have to pay more National Insurance. The state pension age is currently increasing in stages between April 2026 and April 2028, moving up in one-month increments. This means that individuals who turn 67 after April 2028 will be liable for an additional year of NI contributions compared to those who reached the previous state pension age of 66 before April 2026.
Future Increases and Impact on Retirees
Future retirees will likely face even more NI payments, as the state pension age is set to rise again from 67 to 68 between April 2044 and April 2046. A 2023 independent report commissioned by the government suggested bringing this timetable forward by three years, but the then-Conservative government declined to adopt the recommendation.
In its social media post, HMRC directed customers to its 'Tax Confident in retirement' guidance page, which covers topics such as taxation of savings and investments, inheritance tax, and how self-assessment and simple assessment work.
Practical Advice for Pensioners
HMRC emphasised that the tax rules are straightforward for those who choose to work while drawing their pension. The agency's video featured the Q&A format to clarify common misconceptions. According to HMRC, many people opt to continue working after reaching state pension age, and the tax implications are clear.
The changes highlight the importance of planning for retirement, especially as the state pension age continues to rise. Individuals affected by the increase should review their NI contribution records and consider how the additional year of payments might impact their overall tax position.
