State pensioners urged to delay pension due to HMRC tax bills | Personal Finance | Finance

State pensioners are being told they could avoid an unwanted HMRC tax bill – by delaying their state pension. Although some people don’t realise, the state pension is already taxed. Anyone who earns more than £12,570 in a single tax year will be liable to pay 20% income tax on every £1 above that amount, and state pension payments do count towards that.

Of course, a pensioner who has no other income (or savings interest) in a single tax year will not earn enough to pay tax but with the Triple Lock taking pensions to over £11,900 this year, pensioners are only roughly £600 away from paying tax on their state pension income even if they have no other income at all. For those who are likely to get snarled up in paying tax in retirement, financial experts are urging pensioners to consider delaying their state pension to avoid it.

This has two benefits: you won’t lose any of the 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.

“The full new State Pension now pays £230.25 a week, or around £11,970 a year, just a few hundred pounds shy of the personal allowance. Add even a modest private or workplace pension, and suddenly you’ve got a tax bill.

“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.”

“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.”

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%.

Yet if you don’t need the extra income now, and you know you’ll drop a tax bracket once you do 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.”