News | May 2024 | This month marks the debut of tax payments for an additional 650,000 pensioners

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May 2024 | This month marks the debut of tax payments for an additional 650,000 pensioners

Approximately 650,000 retirees now confront the possibility of taxation on their pensions for the first time starting this month. This is attributed to a substantial increase in the State Pension effective April 6, coupled with static tax thresholds that will ensnare them within the tax system, as estimated by Lane, Clark, and Peacock (LCP).

The 8.5% boost to the State Pension from this month comes thanks to the so-called 'triple lock' which raises the State Pension this year by £902.40 to reach £11,502.40 from April 6. The triple lock guarantees that the State Pension will rise each year by the rate of inflation, average earnings growth or 2.5%, whichever is greater.

This is the second year in a row with a major boost to the State Pension's value, after a previous 10.1% rise in the State Pension between 2022/23 and 2023/24. The tax charge for so many people arises because the Personal Allowance has again been frozen at £12,570, and if they have other pension income then they will be pulled into the tax regime. This is something known as 'fiscal drag' and these pensioners will see a cut in the actual amount that goes into their pocket.

WHERE HAVE THESE FIGURES COME FROM?

HMRC's own figures show that the number of people aged over 65 who pay income tax rose by three quarters of a million, up to 8.5m in April 2023 from 7.73m the previous year. The rise of 8.5% would be expected to increase that number still further, to 9.15m, which gives an increase of 650,000 according to LCP.

There was speculation around whether the Government would continue with the triple lock, but with a General Election at some point this year, and a lot of older voters voting Conservative, it wasn't surprising to see another significant rise. Yet the 'stealth tax' achieved by freezing the Personal Allowance will help to clawback some of this largesse.

Steve Webb, former pensions minister and partner at LCP, said: "In terms of the triple lock policy, with a General Election in the offing, it seems quite inconceivable that the government would choose to break the triple lock promise for a second time in three years. Such a decision would be like aiming a laser-guided missile at the core of Conservative support and could fatally undermine the party's electoral prospects.

"What is far less clear is what each party will do when it comes to their manifesto. In 2017, Theresa May removed the triple lock from her manifesto but was forced to reinstate the policy as part of her post-election deal with the Democratic Unionists. In 2019, Boris Johnson decided it was preferable to reinstate the policy. There is no doubt that the present government and opposition would both like to drop the policy in order to make savings to be spent elsewhere. But both want to avoid a situation where they have moved first by dropping the triple lock only to find that the other party has retained it."

WHAT SHOULD PEOPLE WHO ARE DUE TO PAY TAX ON THEIR PENSIONS DO?

As this will be the first time many of these pensioners will be taxed on their pension, it's important to ensure they are paying the correct amount of tax by checking they have the right tax code. This is something your accountant can help you with.

This is something that should be checked no matter where your pension income is from to make sure you are not paying too much or too little tax. More than £42m in the first quarter of 2024 alone has been repaid by the taxman to pensioners who were taxed more than they should have been when taking flexible benefits from their pension, according to HMRC's own figures. The average rebate to pensioners in this period was £3,167 according to calculations from Quilter.

Some of this tax overpayment could reflect people taking larger amounts from their pension during the height of the cost-of-living crisis. But this is still a very large amount of money that shouldn't have been taken from pensioners in the first place.

Ian Cook, chartered financial planner at Quilter, said: "More than 13,000 claim forms were processed in Q1 2024, and those needing access to their funds are faced with an archaic system that over-taxes them and leaves them waiting unnecessarily before they can access the full amount they are owed. This is due to an oddity within the PAYE system which means they are placed on an emergency tax code when they first withdraw from their pension pot. For those who need to access their funds quickly, this can present a significant hurdle. "This has caused a significant issue for those who are accessing their pension funds for years and has been exacerbated by the strain that the cost-of-living crisis has had on people's finances over the last year or so. The system is desperately in need of an overhaul as, at present, the process is leaving people facing unnecessary emergency tax and adding additional strain at a time when many are still struggling with the cost of living."

HOW CAN YOU STOP THIS HAPPENING?

As soon as you can, you need to make sure you have the right tax code. This is something your accountant will be able to check for you, and it can save you a lot of heartache waiting for money that is better in your pocket than the taxman's.

Many people find dealing with HMRC intimidating. But you should only pay the amount of tax due, no more and no less. So, if you think something is wrong, or you have less money in your pocket when you first take your pension that you expect, then challenge it. Your accountant can help you, and it will save you having to wait months to get that money back.

Your accountant can have these conversations with HMRC on your behalf which will make it less likely that you will overpay tax. One tip is to make several smaller withdrawals as you need them, so you don't face an incorrect tax code on an initial lump sum. This way, there is time to update the tax code so you're off the emergency code before you withdraw more money.

CONTACT US

If you seek guidance on minimising unnecessary tax payments on your pension, please contact us on 01709 327 215 or via email at info@branagans.co.uk.

We'd be pleased to assist you in comprehending your tax situation.