UPDATE: |People over 60 warned they face big tax bill on pension and ‘it’s happening quietly’ News

‘Many older people will just receive a letter or notice a tax code change, with no idea why they’re suddenly being taxed on their pension income’

People over 60 have been warned that they face a big tax bill on their pension and that ‘most won’t even see it coming’.

Experts have warned that nearly half of new taxpayers by 2027 will be over the age of 60 due to a combination of frozen tax thresholds and rising pension payments.

This mixture of circumstances is quietly pushing more retirees into the tax bracket, experts say, meaning nearly 18 million more people are expected to be paying income tax by 2027.

The amount state pension increases by each year is determined by the ‘triple lock’, which guarantees payments will rise by whichever is highest out of the annual rate of inflation, average growth in earnings, or 2.5 per cent.

In April this year, payments rose by 4.1 per cent, in line with wage growth, which saw the new state pension rise from £221.20 to £230.25 per week.

Fiona Peake at Ocean Finance said many pensioners will be unaware that increasing payments may push them into paying income tax in the coming years.

She warned: “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 £221.20 a week, or around £11,500 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 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.”

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Ms Peake said there are a number of ways for pensioners to keep the price of their tax bill down, such as looking for tax breaks and maxing out tax-free ISAs with savings.

The expert said it’s worth thinking carefully about how you withdraw money from your pension. “If you’ve got a defined contribution pension, think about how you take money out,” she urged. “Spreading withdrawals across tax years, instead of taking a large lump sum, can help keep your income below the threshold and it’s something people often overlook.”

People can also cut their tax bill through the marriage allowance, which some are unaware they are entitled to. “Married couples or civil partners could save over £250 a year if one earns less than the personal allowance,” she explained. “If one of you isn’t using all your tax-free allowance, transfer some of it. It’s a really simple way to cut your tax bill.”

Keeping your savings in an ISA is also worth considering, Ms Peake said. “ISAs protect your savings from tax, including interest and dividends,” she said.

The expert said current rates make it a “good time to build up your ISA pot” especially with inflation now coming down. “The more you shelter in an ISA (up to £20,000 per year), the less likely you are to tip into paying tax unnecessarily,” she said.

Ms Peake said delaying your state pension “if you can afford to” can also pay off in the long run. “For every year you delay, it goes up by nearly 5.8 per cent, and that higher amount is paid for life,” she explained.

She added: “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.”

Ms Peake also urged pensioners to double check their tax code as sometimes HMRC can get it wrong, which “could mean you’re paying too much”.

She said: “It’s a good idea to check your code every year, especially after changes like retiring or starting to take a private pension.”

Finally, for those still earning, she said adding more to your pension could be a “clever move”. Ms Peake explained: “You’ll reduce your taxable income, get tax relief on your contributions, and boost your retirement pot at the same time. It’s one of the few ways to shrink your tax bill now and benefit later.”