At 71, I’m paying tax on my £16,000 state pension – I’ll have to get a part-time job ...Middle East

In the next few years, millions of retirees will be dragged into owing income tax on their state pensions.

As the state pension rises due to the triple lock mechanism – which ensures payments increase by the highest of inflation, average earnings growth or 2.5 per cent – the full new state pension, which is currently just under £12,000 a year, will increase above the £12,570 personal tax threshold.

There has been much discussion about what will happen when the payment rises this much, with Chancellor Rachel Reeves suggesting that those who rely on the state pension alone, without any private pension income alongside it, will be spared of income tax bills.

But in actual fact, many state pensioners already get payments that are above the tax threshold. Alan Perkins is one of them.

Alan, 71, is one of half a million pensioners who retired since 2016 on the new state pension, who gets what is known as a “protected payment”, which takes his annual state pension to around £16,000.

Until last year, he didn’t notice he was being taxed, because he was still working part-time alongside getting the payment, and thought the tax he was paying was for that work.

But since being let go from his job working part-time in a recycling centre, he started getting letters from HMRC saying he owed hundreds of pounds of tax, something he describes as “a bit of a gut punch”.

Alan will start off owing just under £700 a year to the taxman this year, but as his pension increases this bill will go up, and he says its started making him look for more part-time work to supplement his income.

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“I initially thought the tax demand was a mistake,” says Alan, who lives with his wife near Ipswich in Suffolk.

He eventually clarified with HMRC that he did owe the tax, but he doesn’t believe that the Government properly understands that there are people in his situation owing tax.

Alan adds: “They’re giving me money with one hand but taking it away with the other.”

His state pension is so large because he built up a large entitlement to the State Earnings-Related Pension Scheme (SERPS), which was a UK government pension plan that operated from 1978 to 2002. It provided an additional pension on top of the basic state pension.

When the new state pension was introduced for those who retired after 2016, those who would have received a bigger payment under the old system, like Alan, were able to lock in the bigger payment.

“The only reason I have a state pension that big is because I was working enormous amounts of overtime to pay our mortgage that at one time was 15 per cent interest,” he explains.

He says he’s unhappy that the frozen tax allowances are forcing him to pay tax.

“At the moment I am now looking for a job, just so that I can afford to pay the tax on my state pension. This cannot be right surely?” he asks.

In last week’s Budget, Rachel Reeves took the decision to extend a freeze on the salary threshold at which income tax payments of 20 per cent kick in until 2031.

Alan says he understands why the Government needed to raise more money to pay for services, but says the extra tax burden is not being correctly targeted.

“They’re not aiming it at the right people. There’s some people you think ‘how the hell have they got so much?’ but we’re sort of the easy target. I don’t begrudge people who have more money but they should be paying the appropriate amount tax,” he says.

He also says he recognises pensioners are not the only people being affected by tax rises.

“They put up the minimum wage at the Budget but a lot of that money will be repaid in tax too,” he says.

Despite his frustration, he also has some sympathy for the Government.

“The grief Rachel Reeves was getting, I wouldn’t want that job for any money,” he says.

“I think there used to be so little news on the Budget, but now there’s so much lead up. I know some of it comes from the Treasury, and I think frankly they should probably shut up about it until the day. Speculation doesn’t really help anybody,” he explains.

The £12,570 income threshold at which people start paying income tax has been frozen since 2022 and as the state pension continues to increase, retirees receiving only the full new state pension will start owing some income tax on the state pension alone within the next two years.

Calculations suggest that by the 2029/30 tax year, those getting the full state pension will receive a taxable amount of £13,570.85, meaning they will in theory owe £200 in tax.

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Rachel Reeves told consumer champion Martin Lewis that those only taking home the new state pension – with no other kind of private pension income – will not have to pay tax during this parliament.

She said: “If you just have a state pension, and you don’t have any other type of pension, we are not going to make you fill in a tax return, and I make that commitment for this parliament.”

It is understood that the government will exempt people on both “basic” and “new” state pension, but not people who already pay tax because they earn extra state pension income through SERPS.

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