Pension tax ahead of the Autumn Budget

With the Autumn Budget approaching on 28th October, pension taxation is an area worth keeping under review. The relationship between State Pension increases and frozen income tax thresholds has raised questions for retirees, while the government still needs to clarify how it intends to protect lower-income pensioners.

The State Pension and income tax threshold

The personal allowance remains at £12,570 and is currently frozen until April 2031. Meanwhile, the State Pension continues to rise under the triple lock, creating the prospect of more pensioners finding their income exceeds the tax-free threshold.

The State Pension is taxable, although it is paid without tax being deducted at source. Whether tax is due depends on an individual’s total taxable income, including any workplace or private pension and other relevant income.

The government has committed to preventing pensioners whose only income is the basic or new State Pension from having small tax bills collected through HMRC’s Simple Assessment process from the 2027/28 tax year, where their pension exceeds the personal allowance. The detail of how this will work remains outstanding.

Could the Budget bring further clarity?

The upcoming Budget provides an opportunity for the government to explain how it intends to deliver on that commitment. However, any changes to pension taxation or the personal allowance should not be assumed before the Chancellor’s announcements.

For now, pensioners and those approaching retirement should understand how their different income sources interact with the current tax rules. It may also be worth checking whether tax deducted from previous pension withdrawals was correct, as eligible individuals may be able to reclaim overpaid tax through HMRC.

Review your pension tax position

Pension income and tax planning are closely linked, particularly where several income sources or retirement withdrawals are involved. Understanding the current rules can help you identify questions to address before any new measures are announced.

If you would like to review your tax position or understand how pension income affects your wider financial affairs, get in touch with Verallo to discuss how we can help.