Surprise HMRC bills as pension rises hit Personal Allowance

The issue comes down to the frozen personal allowance, which remains stuck at £12,570. As the state pension increases each year, it takes up more of that tax free limit.

That leaves less room for any extra income. Even a small private pension or part time earnings could now push some retirees over the threshold and into paying tax for the first time.

Experts warn this “stealth tax” effect is catching more people than expected, as rising incomes collide with frozen thresholds.

Tim Grimsditch, Managing Director at Unbiased, said the increase in the state pension is creating a problem for many people.

“For millions of retirees, the latest increase in the state pension is a double-edged sword.

“While the ‘triple lock’ is doing its job by protecting the value of pensions against inflation, the government’s decision to keep the personal tax allowance frozen at £12,570 is creating a ‘stealth tax’ trap.

“As the state pension rises to meet the cost of living, it is consuming more and more of that tax-free buffer. For many, this means that even a modest private pension or a small amount of part-time work could now result in an unexpected tax bill.

“If you’re unsure, seek help from a professional financial adviser who can help clarify your position, reduce uncertainty, and plan with greater confidence.”

At the same time, savers and workers are being warned they could miss out on up to £1,500 by not using key tax-free allowances before the deadline.

Here are four allowances to check now.

ISA allowance

You can save up to £20,000 per year in an ISA without paying tax on interest, dividends or capital gains.

• Covers Cash ISAs, Stocks and Shares ISAs or a mix
• Returns are completely tax free
• Allowance resets on April 6

For example, £20,000 saved at 5 percent interest could earn £1,000 tax free.

Capital Gains Tax allowance

You can make up to £3,000 in profit from selling assets tax free.

• Applies to shares, crypto and second properties
• Not applicable to your main home
• Tax applies above the threshold

Rates above the allowance are 18 percent for basic rate taxpayers and 24 percent for higher rate taxpayers.

Dividend allowance

If you own shares, you can earn up to £500 in dividends tax free each year.

• Applies to income from investments
• Tax rates depend on your income band
• Allowance has been reduced significantly in recent years

Even small portfolios can exceed this limit, leading to unexpected tax.

Personal savings allowance

You can earn interest on savings tax free depending on your income.

• Basic rate taxpayers get £1,000
• Higher rate taxpayers get £500
• Additional rate taxpayers get no allowance

However, rising interest rates mean more people are now exceeding these limits.

Why more people are paying tax on savings

Frozen thresholds and higher interest rates are pulling more savers into paying tax, a process known as fiscal drag.

For example, £20,000 saved at 4.58 percent earns around £916 in interest each year.

This exceeds the £500 allowance for higher rate taxpayers.

Similar savings in an ISA would be tax free.

Research shows over a third of people have never heard of the personal savings allowance, while billions have been paid in tax unnecessarily over the past decade.

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What to do before April 5

With the tax year ending soon, acting now could protect your savings and reduce your tax bill.

1. Use your full ISA allowance before it resets
2. Review savings and investments for unused allowances
3. Consider moving savings into tax efficient accounts
4. Check if rising income could push you into paying more tax

Financial experts say taking action now can help avoid unexpected bills and make your money work harder.