Millions to Receive 8.5% Boost to Pension Payments
Nearly half a million retirees in the UK are expected to face a surprise tax bill next year as a result of a significant increase in state pension payments. The boost, estimated to be 8.5%, is due to the triple lock system. However, around 400,000 state pensioners will be affected by the freeze on the personal allowance threshold, resulting in a tax liability for those earning above £12,570 per year.
Tax Collection Challenges for State Pensioners
Pensioners who have both a state pension and a private pension will have any tax owed collected through the tax code applied to the private pension. However, a growing number of pensioners will find themselves over the tax threshold based solely on their state pension. Since state pensions are paid in full before tax deductions, there is no automatic way to collect the tax owed. This could lead to unexpected tax demands for pensioners who may not have realized they owed tax.
Introduction of 'Simple Assessment' System
Affected households will not be required to fill in a self-assessment tax return. Instead, the HM Revenue and Customs (HMRC) will utilize a system known as "simple assessment". Under this system, the Department for Work and Pensions (DWP) will inform HMRC at the end of the tax year about the amount of state pension received by each individual. If this pushes the individual over the income tax threshold, HMRC will send a tax bill by mail at the end of the following tax year.
State Pension Payments for Next Year
The state pension is set to increase in April 2024, with payments expected to rise by 8.5% under the triple lock system. The triple lock ensures that state pension payments increase based on the highest of three factors: wages for May to July, 2.5%, or September's inflation figures. As the growth in employees' average total pay was 8.5% in the three months to July and inflation remained at 6.7% in September, payments will rise in line with wages. The exact amount of the increase will be confirmed by the government next month.
Income Tax Thresholds and Rates
The current personal allowance for income tax is £12,570, meaning individuals who earn this amount or less pay no income tax. Between earnings of £12,570 and up to £50,270, the basic income tax rate of 20% applies. Earnings above £50,270 are taxed at the higher rate of 40%, while the additional rate of 45% applies to earnings above £150,000. It's important to note that personal allowances can vary depending on individual circumstances, such as the blind person's allowance for individuals with sight issues.
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