The recent Budget introduces several changes that will directly affect pensioners over the next few years. While there is positive news for those receiving the State Pension, some adjustments will also result in more pensioners becoming liable for tax.
State Pension: Triple Lock Increase Continues
The government has confirmed that the triple lock will remain in place. This means the State Pension will continue to rise each April based on the previous September’s inflation rate.
This provides welcome protection to pensioner incomes by helping them keep pace with the cost of living.
However, this ongoing annual increase has an important consequence. By the 2027/28 tax year, the full State Pension is expected to exceed the standard Personal Allowance. As a result, many pensioners who currently pay no tax may find themselves brought into the tax system for the first time.
What Does This Mean in Practice?
Although tax is not deducted directly from State Pension payments, the pension counts towards your Personal Allowance. Once it exceeds that allowance, any additional income—such as private pensions, part-time earnings or investment income—becomes taxable.
From 2027/28 onwards, most individuals receiving the full State Pension will therefore have some level of tax to pay.
How Will Tax Be Collected?
HMRC is likely to collect this tax through:
- Adjustments to tax codes applied to private pension payments; or
- Direct communication
Notably, HMRC has confirmed that simple assessments will not be used, so further clarification on the method of collection is expected in due course.
Investment Income: Additional Tax Rates Coming
Many pensioners rely on savings and investment income, and the Budget introduces further changes in this area:
Dividend Income
From April 2026, dividend income above the £500 dividend allowance will be taxed at an additional 2% for all but additional-rate taxpayers (except at the additional rate).
Savings Interest
From April 2027, bank and any other form of interest that you may receive will also be subject to an additional 2% tax.
These changes mean pensioners with investment portfolios, sizeable savings, or higher levels of unearned income may see increased tax liabilities.
ISA Allowances for Pensioners: No Change
A positive point for those aged 65 and over is that ISA allowances will remain unchanged. While ISA rules are being adjusted for other groups, pensioners will still be able to invest up to £20,000 per tax year across cash ISAs, stocks and shares ISAs, or a combination of both.
This continues to offer a valuable tax-efficient savings option.
Preparing for the Changes
Many pensioners are unaware that increases from the triple lock may push them into paying tax for the first time. It is sensible to review income levels now, assess the potential tax impact, and identify whether any planning opportunities exist.
Need Advice?
If you are unsure how these Budget changes may affect your tax position, pension income or investment strategy, please get in touch. Our team can help you review your circumstances and ensure you are prepared well ahead of the upcoming changes.
Please always seek professional advice before taking any action. We are happy to answer questions in future issues. Please send your questions through the contact us page on our website: www.champconsultants.co.uk
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