Your pension is going up -
but will you need to pay tax on it?
Things are happening at present which could soon mean your tax situation is more complicated than it was in the past.
Two particular factors are worth consideration. Firstly, interest rates have gone up in recent times - 14 times since December 2021; the official base rate has increased from 0.1 percent to 5.25 percent - meaning the amount of interest that is being earned on savings is increasing. Meanwhile, State pensions are also going up and will increase significantly again in April (possibly by 8.5 per cent).
Neither of these things are bad in isolation: those who are eligible are going to be receiving more money from the State pension. They’re also going to be getting better rates of interest on any savings. But before popping open the Champagne, you need to be keeping a close eye on what’s happening with your taxes; otherwise, you could soon be in for a rather nasty surprise.
If you’ve already retired or are approaching retirement you should pay especially close attention. According to estimates, the number of people being taxed on their pension income is expected to increase to 9.15 million in the 2024-25 tax year. Indeed, around 8.5 million people aged 65 and over are expected to pay income tax this year, an increase of 770,000 from 2022-23. This is due to the state pension increasing while income tax thresholds remain frozen.
Basic-rate taxpayers can receive £1,000 of interest each financial year without paying any tax, while higher-rate taxpayers can receive up to £500. Yet with accounts paying much higher rates of interest on savings, many will hit their limit much sooner.
According to the investment platform AJ Bell, 2.73 million Britons are set to pay tax on their cash savings interest in 2023-24, compared to 800,000 in 2020-21.
Here is just one example of how it could happen. Say you’ve got 10 different bank accounts and earn £1,000 of interest on the money in each account. The banks and building societies will report that to HMRC, who will then use the information to amend your tax code. However, HMRC won’t adjust your tax code until well after this tax year, possibly 12 months from now. By which time you may have spent the money you’ve earned the interest on. Not good when a brown envelope tax demand suddenly lands on your doormat.
Steve Webb, the former minister of pensions and now partner at consultants Lane Clark and Peacock, has also warned that hundreds of thousands of women pensioners who have shared part of their income tax allowance with their husband could face “unexpected tax bills as a result of the freezing of the income tax allowance”. As things stand, the non-taxpayer can sign over 10 percent of her personal allowance to her husband. The wife can remain a non-taxpayer - provided she is more than 10 percent under the tax threshold. However, large cash increases in the value of the state pension, together with a freezing of the tax threshold, means more women will now go over the 90 percent threshold.
Where are you keeping your money?
Another issue to bear in mind is whether you might be paying too much tax needlessly. Would you be better off putting your money into an ISA or in Premium Bonds - which are tax free - as opposed to an ordinary taxable savings account?
What might be in the Budget?
Some of the above may be addressed in the Autumn Statement but we aren’t holding our breath. With an election looming next year the government may decide to kick the can down the road. The Personal Allowance (PA) - the amount you can earn or receive each year before paying income tax - will, according to the Chancellor Jeremy Hunt, remain frozen at £12,570 until 2028. The fact that Hunt only made the announcement 12 months ago means it’s unlikely we’ll see a change of course in this year’s Autumn Statement. The freezing of the PA like this is effectively a stealth tax. In other words, it’s a way of stealthily increasing the tax take for the government. Pensions are going up but you’re being taxed more - otherwise known as give with one hand, take with another.
There have been rumours in some of the newspapers that Jeremy Hunt may cut inheritance tax in the Budget. These are only rumours at this stage. Some of the papers are also saying the Chancellor may cut working age benefits. Both of these things could feasibly happen. However, as Torsten Bell of the economic think tank the Resolution Foundation has pointed out, it would be surprising if the government were to do anything that would allow their Labour Party opponents to frame the budget as benefiting even the reasonably well-off at the expense of the poor.
Efficient tax planning
Here at FiveWays we can try to maximise the income you can get from the cash you have in savings while ensuring you keep hold of as much of it as possible. It’s always better to be proactive with your tax planning, but this is especially true when the Chancellor is overseeing a system in which millions of people are unknowingly being dragged into higher-rate bands.
If you’re concerned or just curious about what it might mean for you, pick up the phone and give us a call or, alternatively, drop us an email.
Are you unsure about any of the tax changes?
Feel free to reach out to one of our specialist advisors to talk through any of the tax changes announced in the Budget or if you want advice about efficient tax planning.