Personal Allowance threshold: 5 ways pensioners can beat the stealth Income Tax rise in 2024

With a freeze on personal allowances forcing an additional 1.6 million pensioners into paying Income Tax, we reveal how you can hold on to more of your hard-earned cash.

On the face of it, there was good news for UK retirees this week as the State Pension rose by 8.5%, which is the second largest increase in its history.

For those on the basic State Pension, this will mean an annual income of £8,814, while those who reached retirement age after April 2016 will receive £11,502.

The increase reflects the Government’s ‘triple lock’ commitment on pensions, which guarantees that payments will rise in line with inflation, average earnings, or by 2.5% – whichever is greater.

You can read more about the different types of State Pension in our comprehensive guide

Almost two million more pensioners paying tax

Although any increases in State Pensions are, of course, welcome, the situation is perhaps not as rosy as it first appears.

As part of his Spring Budget, chancellor Jeremy Hunt announced a freeze on personal Income Tax allowances, with the Basic Rate threshold being held at £12,570 until at least 2028.

For a pensioner receiving the full rate of £11,502, it would take additional yearly earnings of just over £1,000 per year to drag them into this tax band.

In fact, figures from the House of Commons reveal that an additional 1.6 million pensioners will be paying Income Tax in the next four years as a result of the freeze.

Here, we look at five ways pensioners can shelter as much of their income as possible from this stealth tax raid.

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1. Defer your State Pension

If you have another source of income, you could consider deferring your State Pension to reduce your tax liability.

Contrary to what some people believe, there is no requirement that you start claiming your State Pension as soon as you become eligible for your payments.

As you approach State Pension age, you should receive a letter telling you what to do if you would like to begin claiming your pension.

If you decide to defer, you don’t need to do anything at all.                                                         

Bear in mind that deferring your pension will result in an increase to your payments when you do finally claim.

For every nine weeks you defer, your payments will rise by 1%.

While higher payments are theoretically a good thing, this could push you closer to the Income Tax threshold when you do start to claim.

Learn more in our guide to deferring your State Pension

2. Maximise your ISA savings

Whatever your age, ISAs should always be your first port of call if you would like to reduce your taxable income.

Under current rules, these products allow you to stash away up to £20,000 per year in tax-free savings.

At present, the main types of ISAs available to those over State Pension age are Cash or Stocks and Shares ISAs.

Cash ISAs can be instant access, fixed rate or notice accounts (requiring you to let the provider know in advance if you intend to make a withdrawal).

Meanwhile, Innovative Finance ISAs allow you to invest in peer-to-peer lending and earn tax-free interest.

During the chancellor’s Spring Budget speech, however, he also announced the launch of a British ISA, which will allow you to invest an additional £5,000 per year in UK assets.

Although the Government has yet to announce a launch date for the British ISA, this is unlikely to be before April 2025.

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3. Use the Starting Rate on savings

All UK taxpayers currently have a Personal Allowance that enables them to earn up to £1,000 in savings interest before they start paying tax.

The Starting Rate provides an additional allowance of up to £5,000 for those on a low income.

Be aware, however, this is a tiered perk.

If you earn under the Basic Rate Income Tax threshold (£12,570) from your pension or employment, you’ll receive the full tax-free allowance of £5,000.

Those earning between £12,570 and £17,570 will still qualify for tax relief on their savings interest – although you’ll lose £1 of your allowance for every £1 you earn above £12,570.

If you’ve overpaid on savings income in previous tax years, you can reclaim this money by filling in a Self Assessment form with HMRC or completing form R40.

As well as the current tax year, you can claim for any underpayments during the past four years.

4. Take advantage of salary sacrifice schemes

If you’re still working – even part-time  – you should investigate any salary sacrifice schemes offered by your employer as this can be a great way to reduce the amount of tax you pay.

Under these arrangements, your employer will lower your actual cash payments in return for another non-cash benefit of equal value.

From HMRC’s perspective, these schemes will reduce your taxable income, which allows you to hold on to a greater proportion of what you earn.

Salary sacrifice benefits can include cycle-to-work initiatives, additional leave or company car schemes.

5. Claim the Marriage Allowance

Having been introduced in 2015, this allows the lower-earning member of a couple to transfer any unused portion of their Income Tax allowance to their spouse or civil partner.

Lower-earning partners can transfer up to £1,260 every tax year, which equates to a saving of £252 for the 2024/2025 tax year.

You can also backdate your claim to 2020, which could mean additional savings.

Once you’ve claimed the allowance, the transfer will automatically continue every year until the marriage ends (either by death or divorce).

If you do wish to cancel the transfer in other circumstances, you’ll need to inform HMRC directly.

Be aware, this perk is exclusively for those who are married or in civil partnerships and cohabiting couples won’t qualify.

Hundreds of thousands of pensioners at risk of tax shock

This article does not constitute financial advice. Consider speaking to an advisor before making any decisions regarding your retirement plans.