State Pension warning for 300,000 set to get letters on doormats with first tax demand as payments rise £400
TENS of thousands of pensioners are set to get tax demands for the first time since they stopped working.
It is expected that 300,000 more retirees will be told to be pay tax as the state pension is expected to rise by over £400 next year.
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%.
Over the next six weeks, HM Revenue & Customs (HMRC) is writing to 560,000 customers as part of its “simple assessment” process which assesses who needs to pay what tax.
It was expected that around 140,000 pensioners were going to receive a letter over the coming months, but because of suspected increase in the state pension an extra 300,000 will now also get one.
Internal Treasury calculations, seen by the BBC, show that changes would take the state pension to around £12,000 in 2025/26, from £11,501 currently.
However, increasing the state pension will hit thousands of pensioners with a tax bill as a result of personal allowance thresholds being frozen until 2026.
The personal allowance is how much money you can earn before you have to pay tax on it. Under current rules, this is up to £12,570 in a tax year.
Steve Webb, partner at pension consultants LCP, told The Sun that because of these frozen thresholds, a further 300,000 or more retirees will be “dragged into the tax net”.
“Many people retiring on modest incomes may have hoped that one thing they could give up in retirement was having to deal with HMRC,” he said.
“Some will see the tax clawed back from their modest private pensions whilst those with only a state pension will get an end year ‘simple assessment’ tax demand from HMRC. “
He added: “Paying tax in retirement is now the experience of the majority of pensioners and this trend will only increase unless policies are changed”.
HMRC previoulsy 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.
Plus, you can even pay in instalments if you want – 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.
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.
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.”
Other ways you can save on tax
Tax-free childcare
Families can claim up to £2,000 a year tax-free to go towards childcare costs, as well as 30 hours of free childcare if they are eligible for both.
To be eligible, both parents must work at least 16 hours a week and earn the minimum wage or above.
Visit gov.uk/tax-free-childcare to get started.
Savings allowance
Low earners taking home between £12,570 and £17,570 a year could earn up to £5,000 in interest on their savings without having to pay a penny in tax.
This situation is most likely to apply to pensioners who have a lot of cash in savings but are no longer earning a wage or are reliant on the state pension.
If you earn more than this, you can still make £1,000 in interest tax-free.
Marriage allowance
Couples on a low income who have tied the knot could save £252 a year with the marriage allowance.
The allowance allows one partner to share 10% of their £12,570 tax-free personal allowance with the other to reduce their tax bill, assuming they have it spare.
Claims can be backdated for up to four years, saving a taxpayer £1,260 in total.
You can claim it on the Government website.
Trading allowance
Savvy sellers could earn up to £1,000 a year by flogging their wares or services with the trading allowance.
The allowance could save basic-rate taxpayers up to £200 a year in tax.
Rent out your home or driveway
Anyone with a driveway to spare or going away for a few weeks could earn up to £1,000 tax-free.
You can rent your home on Airbnb while you are on holiday or let out your driveway to commuters for a bit of extra cash, and as long as you earn below the £1,000 threshold, you don’t need to pay a penny in tax.