Pension Fees Strike Millions

Rising Number of Pensioners Paying Income Tax

Recent data from HM Revenue and Customs (HMRC) indicates that approximately 8.7 million pensioners are expected to pay income tax on their retirement funds in the financial year 2025/26. This represents an increase of around 420,000 compared to the previous year, 2024/25, and a significant rise of 1.85 million when compared to figures from a decade ago, in 2015/16.

Helen Morrissey, a representative from Hargreaves Lansdown, has highlighted concerns about this trend. She notes that while rising incomes among retirees may be a positive sign, the stagnation of income thresholds is also contributing to more pensioners falling into the taxable bracket.

The Personal Allowance threshold remains fixed at £12,570 until April 2028. However, projections suggest that the New State Pension will exceed this limit by April 2027. In the current fiscal period, the full New State Pension stands at £11,973, according to reports.

Morrissey explained the situation, stating: "The number of pensioners paying tax is increasing. On one hand, this reflects higher incomes among retirees, but it's also clear that frozen tax thresholds have played a major role in pushing more people into the taxable category. With the freeze set to continue until 2028, we can expect these numbers to keep growing."

She also outlined potential strategies for managing tax liabilities. For instance, up to 25% of a pension can be taken tax-free, which can help individuals stay below the income tax threshold. Additionally, she emphasized the importance of other financial tools such as Individual Savings Accounts (ISAs), which offer tax-free income and can be used alongside pensions to reduce overall tax liability.

Strategic Financial Planning for Retirees

It’s important to note that income from ISAs is entirely tax-free, making them a valuable asset for retirees looking to manage their tax obligations. Morrissey pointed out that pensions can also play a key role in helping working-age individuals navigate their tax commitments effectively.

She clarified: "Contributing to a pension reduces your adjusted income, which can lower the amount of tax you pay or even prevent you from crossing into a higher tax bracket. This is particularly beneficial for those earning between £100,000 and £125,140 per year, who may face the so-called 60% tax trap that erodes their personal allowance."

The Triple Lock mechanism ensures that both the New and Basic State Pensions increase annually based on the highest of three factors: average earnings growth, inflation (CPI), or a minimum of 2.5%. This policy aims to protect the value of state pensions against inflation.

In April, the New and Basic State Pensions saw a 4.1% increase, but projections from the Labour Government suggest a 2.5% rise over the next four years. Based on these predictions, the full New State Pension is expected to reach £12,578.80 by the 2027/28 financial year—just £78.80 above the Personal Allowance.

While the taxable portion of the State Pension may seem small, pensioners with additional income sources could find themselves facing larger tax bills unless the payments are automatically deducted through PAYE from private or workplace pensions.

Understanding What Is Taxed

Guidance from GOV.UK explains that tax is payable if total annual income exceeds the Personal Allowance. This includes:

• The State Pension (Basic or New)
• Additional State Pension
• Private pensions (some of which can be taken tax-free)
• Earnings from employment or self-employment
• Taxable benefits
• Other income such as investments, property, or savings

Retirees can use online tools on GOV.UK to determine if they need to pay tax on their pension. These tools require knowledge of:

• Whether they receive a State Pension or a private pension
• The amount of State Pension and private pension income they will receive this tax year
• Any other taxable income they might have

It should be noted that certain types of income, such as foreign income, Marriage Allowance, or Blind Person’s Allowance, cannot be assessed using the tool.

Future Projections for State Pension Increases

According to the latest Triple Lock predictions, the following increases are expected for the State Pension:

• 2025/26: 4.1% (forecast was 4%)
• 2026/27: 2.5%
• 2027/28: 2.5%
• 2028/29: 2.5%
• 2029/30: 2.5%

State Pension Payments for 2025/26

• Full New State Pension:
• Weekly payment: £230.25
• Four-weekly payment: £921
• Annual amount: £11,973
• Full Basic State Pension:
• Weekly payment: £176.45
• Four-weekly payment: £705.80
• Annual amount: £9,175

Future New State Pension Forecasts

Under a 2.5% increase, the full New State Pension will be worth:

• 2026/27: £236 per week, £12,227.30 a year
• 2027/28: £241.90 per week, £12,578.80 a year

Retirees are encouraged to review their financial situation regularly and consider available strategies to manage their tax liabilities effectively.