TENS of thousands of pensioners are set to get tax demands this year for the first time since they retired.
A new freedom of information request by LCP Partners, reveals that nearly 700,000 people received a bill in the post last year, for an average of £665 each.
This was an increase of over 120,000 people compared with two years earlier.
One reason given for the rise is the year-on-year freeze in the value of personal allowance, coupled with a steady increase in the value of the state pension.
The personal allowance threshold, which is the rate at which people start paying tax, has been frozen at £12,570 since April 2021.
The government freezes tax thresholds as a way to raise extra cash without directly increasing taxes.
But as wages or income from pensions rises each year, more people are being dragged into paying tax, or into higher tax brackets.
Steve Webb, partner at pension consultants LCP, told The Sun the “long-term freeze” in the value of the tax-free personal allowance could be finally damaging for pensioners.
He said: “Although an average bill of £665 may not sound very large, it could be the equivalent of about three weeks’ pension and a pensioner whose income is only just above the tax threshold may not have such a sum readily available”.
It is possible that the number of pensioners set to receive tax demands could rise over the coming years.
This is due to the triple lock, which means the payment made to those aged 66 and over rises every April by the highest out of inflation, the average UK wage increase, or 2.5%.
Internal Treasury calculations, previously published by BBC, show that changes would take the state pension to around £12,000 in 2025/26, from £11,501 currently.
This could lead more and more elderly people into paying tax on their pensions.
What to do if you get a letter?
HMRC is sending out letters to thousands of its customers as part of its “simple assessment” process which assesses who needs to pay what tax.
HMRC previously said that the letters going out 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.
If you do get one of the letters, don’t stress, as you have until January 2025 to pay the bill.
You can even pay the fee using instalments as long as it’s fully paid by the deadline.
There is an online guide Simple Assessment guide for pensioners with more information for pensioners who receive a demand.
Why is this happening and is there anything I can do to avoid it?
High inflation rates mean more people in work are getting pay rises to try and keep pace with rising prices.
However, with income tax bands frozen, it means many are being dragged over into the next tax bracket.
Laura Suter, director of personal finance at AJ Bell, previously told The Sun: “Pensioners looking to reduce their tax bill need to think about how they can maximise their tax-free income.
“For example, any withdrawals made from their ISAs will be free of any tax. so they can use that pot of money to boost their income without impacting their tax bill.”
An ISA is a type of savings account in which you can save up to £20,00 a year tax-free.
Ms Suter also suggested that couples can organise their finances so they ensure they are each making use of their tax-free allowances, which might involve moving money or assets between themselves.
Helen Morrisey, head of retirement analysis at Hargreaves Lansdown, added that pensioners might want to use some of their pension to top up their income.
She said: “Most people can access 25% of their pension as a tax-free lump sum so they may decide to use this to top up their income without pushing up their tax bill.”
However, she also warned that pensioners below the personal allowance are going to find it increasingly difficult to avoid paying income tax in the coming years.
The finance expert added: “A full new state pension hits just over £11,500 per year and even relatively modest 3.5% annual increases would see people pushed over the threshold by the time the threshold freeze ends.”
How does the state pension work?
AT the moment the current state pension is paid to both men and women from age 66 – but it’s due to rise to 67 by 2028 and 68 by 2046.
The state pension is a recurring payment from the government most Brits start getting when they reach State Pension age.
But not everyone gets the same amount, and you are awarded depending on your National Insurance record.
For most pensioners, it forms only part of their retirement income, as they could have other pots from a workplace pension, earning and savings.
The new state pension is based on people’s National Insurance records.
Workers must have 35 qualifying years of National Insurance to get the maximum amount of the new state pension.
You earn National Insurance qualifying years through work, or by getting credits, for instance when you are looking after children and claiming child benefit.
If you have gaps, you can top up your record by paying in voluntary National Insurance contributions.
To get the old, full basic state pension, you will need 30 years of contributions or credits.
You will need at least 10 years on your NI record to get any state pension.
