Up to 400,000 pensioners are set to receive warning letters from HM Revenue and Customs (HMRC) this month over a new bill.
The state pension increased by 8.5 per cent at the start of April with the full basic state pension rising to £8,814 and the new state pension to £11,502. This increase will push hundreds of thousands of individuals into the income tax payment bracket.
Anyone earning more than £12,750 will have to pay income tax, which could include pensioners receiving another state pension. The additional state pension consists of three different schemes: the state second pension (2002-2016), SERPS (State Earnings Related Pension Scheme, 1978-2002), and the state pension top-up (October 12, 2015 – April 5, 2017), the Express reports.
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When combined with a basic state pension, these amounts could result in certain pensioners receiving an extra £200 per week, potentially exceeding the tax allowance. Tax expert Andy Wood from Tax Natives warned: “If your state pension is over £242 per week, you may face unexpected tax bills due to the frozen personal tax allowance.”
“With an 8.5 percent increase in state pension from April, pensioners receiving over £242 per week may enter the tax net. The frozen tax threshold of £12,570 heightens the risk of unexpected tax demands.”
Pensioners are set to receive a significant increase in their state pension, with those on the full new state pension seeing their weekly amount rise from £203.85 to £221.20, equating to an additional £902 annually. However, they should be mindful of the tax implications due to the unchanged personal tax allowance threshold.
A spokesperson clarified: “HMRC may use a ‘simple assessment’ to notify pensioners of tax liability. This means you could receive a tax bill after the tax year ends. It’s crucial to be aware of this possibility to plan accordingly.”
State pensions are paid gross, without any tax being deducted at source, which necessitates HMRC employing the “simple assessment” process. At the end of each tax year, the Department for Work and Pensions (DWP) reports the total state pension received by individuals to HMRC.
Subsequently, if a pensioner owes tax on their state pension, HMRC will inform them post-tax year, requiring payment by January 31 of the following financial year.
To avoid potential financial strain, pensioners who might not have other income sources to cover the tax owed are advised to budget wisely. It is estimated that upwards of 400,000 pensioners, or one in five, could be affected by this issue, lacking alternative income for HMRC to collect the necessary tax.
Therefore, pensioners might need to consider putting a part of their state pension aside each month to ensure they can manage any potential tax liabilities in the future.
Pension specialist Adam Pope from Spencer Churchill Claims Advice commented: “Every year, the amount of money retirees get from the state pension goes up and brings them closer to having to pay income tax.”
“Retirees need to be well informed of these changes because it affects how much money they have and if they need to pay taxes.”
He further noted: “It’s a real worry that retirees might get bills for taxes they didn’t expect, especially if they only get the state pension. Getting advice from a legal expert is important to help them understand and plan for any unexpected tax issues.”
According to HMRC data, there has been a 10 per cent rise in the number of over-65s paying income tax from 7.73 million in the tax year 2022/23 to an estimated 8.5 million in 2023/24 following the state pension’s 10.1 per cent increase in April 2023.
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