More than 140,000 pensioners are set to receive tax demands over the next six weeks for the first time since they retired due to the freezing of tax thresholds.
Former pensions minister Steve Webb says HMRC will issue tax demands to tens of thousands of pensioners over the summer because they have been dragged into new tax bands.
This will be the first time these pensioners have received a tax demand since they retired, he says, because their state and private pension income has now gone above the frozen income tax threshold.
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He says: “It is rarely good news to receive a letter from HMRC and in this case 140,000 pensioners will be getting a tax demand in the next few weeks for the first time since they retired. The size of the bill will often be relatively small at first, but this could grow year-on-year if the current policy of freezing tax thresholds continues.
“The recipients of these letters are not well off, and some will have a living standard below the pensions industry’s assessment of the ‘minimum’ income needed for a basic quality of life.”
Tax thresholds remain frozen
Personal tax thresholds have been frozen since March 2021. The policy, which was brought in while Rishi Sunak was Chancellor, was introduced in a bid to help the government make up for the vast amounts of public spending it made during the Covid pandemic.
The money from the 140,000 pensioners will be clawed back via the ‘simple assessment’ process. Where HMRC already holds all the information on someone’s taxable income from wages, state pensions or private pensions, and collects that tax through the PAYE system, it can work out their tax liability without them needing to fill out a full self-assessment tax return.
People usually have until January 2025 to pay the bill and they can pay in instalments if they wish, as long as the total bill is paid by the deadline.
HMRC says: “We’re writing to around 560,000 customers who have taxable income but who are not in self assessment, or for whom we can’t automatically deduct the tax owed via a PAYE tax code. The letter will include a detailed calculation of any tax due for income they received between April 2023 and April 2024.
“They’ll need to pay what they owe using simple assessment. For some, including around 140,000 pensioners who will receive a letter, this will be the first time they’ve received a simple assessment.”
Webb is concerned the process might also make people vulnerable to fraud. He says: “There is also a risk that scammers will catch on to the fact that these letters are being sent out and come up with fake letters trying to get money out of pensioners. The new government needs to take an urgent look at whether taxing so many people on such modest levels of income in retirement is really the right way to proceed.”
An assessment of the tax threshold freeze by the Office for Budget Responsibility (OBR), which was released with the Spring Budget in March, found it would move an extra 3.3 million taxpayers into the higher and additional rate income tax bands by the 2027/28 financial year. There would also be 3.8 million more taxpayers overall.
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