Next year in April, a shocking 650,000 state pensioners will face a new tax raid from Her Majesty’s Revenue and Customs (HMRC). This will come as a significant surprise to many pensioners who had not anticipated having to pay income tax during their retirement years.
According to the Institute for Fiscal Studies, in 2010, when the Tory-led coalition took over, fewer than five million pensioners were paying income tax. However, that number has now increased to over 8.5 million and is set to climb even further. The decision by Chancellor Jeremy Hunt to freeze the personal allowance at £12,570 until 2028 means that from April, even more pensioners will find themselves pulled into the income tax net.
The upcoming rise in the state pension by 8.5 percent in April will bring the new state pension to a maximum of £11,501 per year. This amount is just £1,069 below the personal allowance, resulting in pensioners needing to generate a small income to pay tax on it.
One issue that many pensioners may face is that they normally do not need to complete a self-assessment tax return, as HMRC automatically calculates what they owe. This means that many may not realize they have a tax obligation until it’s too late. When they try to find help by calling HMRC, they may face long waiting times due to jammed helplines.
Andrew Tully, technical services director at Nucleus Financial, explained that HMRC will not tax the state pension itself, but will apply tax to other sources of income. Pensioners who are self-employed or have other earnings, such as rental income from a property, may need to fill in a self-assessment tax return.
The responsibility falls on pensioners to keep track of their tax obligations, and this can be complicated, especially if they have multiple sources of income. Stephen Lowe, group communications director at retirement specialist Just Group, expressed concern that older pensioners on lower incomes, particularly single women, may struggle with the new tax demand, given that they may have never dealt with HMRC before.
He noted that the government needs to ensure that affected individuals understand what is happening, but also highlighted the potential for communication issues similar to those experienced in the past with the Waspi scandal and DWP payment errors.
Becky O’Connor, director of public affairs at PensionBee, advised that pensioners should calculate their total income from all sources using an online tax calculator or seek professional advice, in order to estimate potential tax liabilities. Setting aside funds to cover potential tax bills is critical, she added, and investing in tax-efficient vehicles like Isa or pension schemes can help minimize taxable income.
Additionally, individuals may be eligible to claim the marriage allowance and council tax discounts, and can seek assistance from Citizens Advice and the government’s free MoneyHelper service in case of questions or confusion.
As the number of pensioners impacted by this new tax measure continues to rise, it is crucial for those affected to understand their obligations and seek guidance on how to ensure their financial responsibilities are met.