State pensioners have been warned not to overlook tax rules that could leave them with an unexpected bill. Mike Ambery, retirement savings director at Standard Life, said current HMRC rules leave "little headroom" for claimants to avoid paying tax on other income.
Full State Pension Nearly Exceeds Tax-Free Allowance
The full new state pension is worth around £12,550 a year, while the annual personal allowance – the amount you can earn tax-free – is £12,570. This means a full state pension uses up over 99 per cent of the allowance.
"As a result, additional withdrawals from a private pension could be taxed from the first pound," Ambery said. He urged people to plan early to avoid an "unexpected tax bill."
Government Policy Change Expected
Under current rules, the full state pension will trigger an income tax bill from April 2025. However, the government announced at the Autumn Budget 2024 that it would change the rules so that those whose only income is the state pension will not pay income tax. HMRC said it will need fresh legislation to enact this, but full details have not yet been published.
Risk of Higher Tax Brackets
Ambery also warned about private pension withdrawals that can push retirees into higher tax bands. "What catches people out is how quickly a single withdrawal can push them into higher tax bands," he said. A withdrawal can push income above £50,270 into higher-rate tax at 40 per cent, and above £125,140 into additional rate at 45 per cent (banding differs in Scotland).
Income above £100,000 also reduces the personal allowance by £1 for every £2 earned, eliminating it entirely at £125,140.
"Taking a larger amount upfront can come with a sting in its tail in the form of a higher tax bill than many expect," Ambery added.
