PENSIONSANDSAVINGS.COM

Number of pensioners liable for tax will double since 2010 from 4.5million to over 9million.

Worrying figures suggest cost-of-living rises and frozen tax thresholds will drag millions more pensioners into tax net.

As the new State Pension climbs above 90% of the personal tax threshold, more pensioners may be hit with tax penalties.

Government must recognise distress this will cause to more pensioners and consider addressing this by proper liaison between DWP and HMRC to work out any tax, notify pensioners of the risks – or increase thresholds.

Number of pensioners liable for tax more than doubled since 2010: In 2010, 4.5million pensioners were liable for tax, many were still working or had generous private pensions. The subsequent rises in State Pension are welcome but, coupled with the frozen personal tax threshold since 2021/22, this means more risk of tax liability for pensioners, especially as the previous higher tax threshold for pensioners was removed in 2013. HMRC estimates 8.5million pensioners were liable for tax last year, and the 8.5% State Pension rise from April 2024 is likely to increase the numbers of pensioner taxpayers to over 9million – more than doubling since 2010.

It is worrying that so many more pensioners could be dragged into the tax net: The full new state pension – at £11,502 for 2024/25 – has now reached 92% of the £12,570 personal tax threshold. The full old Basic State Pension is rising to £8814 a year which is 70% of the personal tax threshold, but millions of older pensioners also accrued additional State Pensions (SERPS and S2P – State Earnings Related Pensions, State Second Pension, Protected Rights and Guaranteed Minimum Pensions) – to add to the Basic State Pension, so just a small amount of extra income either from other pensions or savings, will tip more into tax liabilities.  However, many may have no idea they need to pay tax at all, especially if they have never been liable before.

More pensioners are at risk of facing fines for not paying tax they never knew was due: Most of those tipped into tax will be poorer pensioners with little more than their state pension to live on. Most of them will be totally unaware of any liability and will probably never have filled in a tax return in their life. They are then at risk of being hit with fines and penalties for not paying a tiny amount of tax that they didn’t even know about.

Married couples or civil partners could be hit sooner: Pensioners who are married or in civil partnership, who give part of their personal allowance to their partner by using the ‘marriage allowance’ will have an even lower personal allowance of just £11,310, rather than £12,570. They are already at risk of being liable for small amounts of tax without knowing.

What can be done? There are actions the Government could tax to help alleviate the distress being caused to many pensioners who are already receiving penalty notices after failing to file a tax return they never knew was due:

1. Raise the personal tax threshold in line with inflation: Obviously, an increase in the personal tax threshold, which was frozen in 2021/22 and is not due to rise again till after 2025/26, would alleviate some of the pressure, especially as inflation has been so high in the past couple of years.
2. Warn pensioners clearly when they receive their State Pension that they need to check their tax position: DWP should send out clear notification to everyone receiving State Pension notification letters, warning them that they should check their tax position and DWP/HMRC should consider national advertising and a media campaign.  HMRC should also ensure that it has sufficient capacity in its helplines to cope with queries from worried pensioners who will not know what to do about paying the tax.  The current plans to close its helplines over the summer are particularly worrying, because more of those in the pensioner age brackets, especially the elderly, have no digital access and cannot use online services easily. Some firms do have a dedicated helpline for older people to use, this is an idea HMRC might look into.
3. Proper liaison between HMRC and DWP: Pensioners could receive notification of the expected tax liability they may face. DWP does already send information to HMRC about taxable State Pensions (for those whose old State Pension – Basic Pension plus Additional State Pensions exceed the personal tax allowance). Some pensioners will then be sent a Simple Assessment after the tax year has ended, but again many will need help to understand what it is all about if they receive this for the first time. The majority of pensioners being newly dragged into the tax net will probably never had completed a Self-Assessment Tax Return and have no idea how to do so. It is even more important they HMRC recognises the need to support, rather than penalise them.

The tax system is already far too complicated. Careful reform could alleviate some of the social problems, either by better liaison between HMRC and other Government Departments but also by ensuring that people can pay any tax due easily and that they know what their responsibilities will be.  Currently, this is not happening.