As a number of newspapers report this morning, there is a very real risk that millions of pensioners will have to complete self assessment tax returns next year to pay the tax owing on their basic state old-age pensions.
This unprecedented situation has arisen for four reasons.
The first is that in 2021 Rishi Sunak announced that the basic personal allowance (as well as many other tax allowances) would be frozen until 2027.
Then, secondly, inflation happened at rates of more than 10 per cent per annum.
Third, because of the pension triple lock state pensioners are seeing their pensions increase in line with inflation.
And, fourth, HMRC does not (as far as I know) have the means to operate PAYE on state pensions simply because it has never needed it; there has always been sufficient personal allowance to cover the sum owing assuming that the state pension is the first part of income.
As a result, pensioners will not only have a tax bill, they will have to put money aside to pay it, and will have to complete a self assessment tax return, with all the associated risk of serious penalties attached to that process.
The issue is serious, but only indicative of the problem many millions more face as tax bills escalate due to Sunak's policy. Frozen tax allowances impact everyone, but will hit those on lowest income hardest. The IFS think they will result in £50 billion of extra tax paid. That is half the sum I have identified in the Taxing Wealth Report, so far. The difference is that most of this will be paid by those in lower pay.
What this means is that whilst tax should be increasing on the wealthy what we are actually getting is tax increases on those already hardest hit by the cost of living crisis. And the Tories do not care.
But nor, apparently, do Labour. I have heard nothing at all from them on this.
Meanwhile, inequality grows, despair increases, and the penal nature of the self assessment tax system (penal because its penalties are automatic, heavy, and in many cases unjustifiable) will be applied to many more people.
There is a choice available. We could tax the wealthy more. But it is never mentioned. Instead, we are going to tax the lowest paid and pensioners more instead. The one and only question to ask is, why?
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Currently the full basic State Pension (if you reached retirement age by 6 April 2016) is £156.20 per week (about 10 million people), the full new State Pension is £203.85 per week (about 2.5 million people), and full pension credit should get individuals to at least £201 per week (under claimed, but about 1.5 million people). A fraction – around a half to two thirds – of pensioners get the full amounts.
The income tax personal allowance is £12,570, which is £241.73 per week.
So is the concern about people who have a large SERPS/State Second Pension entitlement before they were replaced by the fixed amounts of the “new” state pension?
Are there any statistics for how many people are paid state pensions over £240 per week?
All good points
And all needing inflation by 10%.
There is also SERPS.
The Guardian estimates more than 2 million are impacted.
Andrew
‘The income tax personal allowance is £12,570, which is £241.73 per week’
I am afraid I am a pedant by nature so not quite. The actual personal allowance is 12579, and there aren’t 52 weeks in a year so divide by 52.14. so £241.25 is closer.
£203.85 * 8.5% increase is £221,17, so the only people affected will be those with SERPS and no private pension. Probably fewer than 2 million. If it does become an issue the government can always make sure that it isn’t by breaking the triple lock (one off, again) and ignoring the wage increase that arose from bonus payments. So reducing the pension increase for everyone. I expect they will do that.
This will become much more of an issue in the following year.
Of course increasing the basic tax free allowance is the answer, and is required anyway to avoid increasing the number of the lowest paid who have to pay tax. I expect they won’t do that.
I think you are ignoring pension credit
I’m not sure what that comment means, Richard. AFAIK pension credit is not taxable. Please let me know if I’m wrong because if so I will need to amend my calculations.
I stand corrected
Richard
Pension credit is only available to state pensioners whose total income is less than £201.05 per week, and increases your income to that level. If your income is £201.10 per week you get nothing more. So someone on pension credit will not be affected.
Ok
Thanks
I receive state pension as well as a personal pension. I have always of course paid tax on the total, but this year (23/24) I have for the first time been given a negative tax code! My state pension is a bit above average because it includes some SSP, and I also deferred it for a couple of years, so I am already paying tax on it. But as you say, if I wasn’t on PAYE because of the personal pension, how would HMRC collect it?
You would have to do a tax return
You’re right. I have been anticipating this, and what’s worse it may mean some pensioners on very low incomes will no longer be able to claim pension tax credit which unlocks many other benefits. Before I retired I had one client who, very puzzlingly, was advised by HMRC that she no longer had to file a tax return when she reached state pension age depite the fact that she had substantial buy to let rental income. I recommended that she file a return anyway, which she did and paid the tax. Goodness knows what would have happened if she had ignored me.
I know someone who had a very similar letter and had income needing declaration every year.
Bizarre.
I don’t understand this.
Every year I get a statement from HMRC giving me my tax code.
They tell me my personal allowance less the state pension and give me my total tax-free allowance which is turned into a code for the pension company to deduct tax.
Surely they can do that for all pensioners.
I sold a business in 2009 and it took until 3 years ago for them to agree that I didn’t need to fill in a self-assessment form! I occasionally ended up owing them 30 or 40 pence in tax because they only work in full pounds, not pence, in their system. I wonder if they still use Sinclair ZX80 computers.
I wonder if they are after the penalties from millions of pensioners who don’t know they will have to fill in these forms.
Or they could then say sorry, we don’t have enough people to chase the offshore tax we are owed, because we are after all these cheating pensioners who are so scared they might owe a few pounds in tax that they don’t apply for pension credit.
This is fine – because you have another source of income to collect tax via.
Some don’t. That is where the issue is – and it is undoubtedly a real one
Had an email this afternoon from HMRC telling me I have 100 days in which to send in my self assessment and pay the tax owed!
Fortunately I keep all messages from HMRC just in case. I have the letter from them saying I don’t need to fill in any more self assessments unless my circumstances change.
I wonder if I will get another one tomorrow telling me to beware of tax scams.
Now you see why I am concerned
So all the worry and hassle of doing a return, plus you won’t get the headline gross increase in pension (and it won’t “cost” the government the headline figure).
Smoke and mirrors as so often……
Plus will the figure for being able to claim Pension credit go up? Tiny personal pensions often take people beyond that limit so, if they don’t move it, even more will miss out (and miss out on all the other benefits they could claim like free dental care.)
So far the pension credit limit has increased in line with the pension increase. Please bear in mind that someone on a basic state pension who retired after 5 April 2016 already gets more than the old state pension + pension credit. It currently increases your weekly state pension to £201.05. Someone said that this may mean people who now can will be unable to claim pension credit. It will have no effect on that.
“As a result, pensioners will not only have a tax bill, they will have to put money aside to pay it, and will have to complete a self assessment tax return, with all the associated risk of serious penalties attached to that process.”
What resources does HMRC possess to handle this additional work, to say nothing of the capacity to investigate the large number of pensioners unable/unwilling to cope with the administrative demands made on them? My question is rhetorical, because I doubt if the resources exist in HMRC.
None.
In a word.
And how many pensioners will actually realise that their income has become taxable?
That is the issue
Would it be more honest to lower the state pension?
I am presuming there is a good reason for making that comment.
I am struggling to think what it might be.
It would be more honest as it is exactly what they want but when have you ever heard of the Tories being honest?
I work for a small charity that helps people who are digitally excluded. I fill in forms for them for benefits, housing applications and a number of other things. About half my clients are over state pension age.
I’m very aware that there are a significant number of people who just can’t fill in forms online, most but by no means all being older people.
This change will create an absolute deluge of extra work for charities like mine and Citizens Advice and Council anti-poverty services that support digitally excluded older people.
There’s sometimes a presumption that their adult children will do it for them which is certainly not true in all cases.
Am I right in thinking the government has not allocated any money to help provide admin support for all these pensioners?
It’s going to be a disaster with many people unable to complete their paperwork and experiencing great distress.
I agree with you.
And thanks for what you do.
This news comes in the environment where the govt seriously expects us to pay extra on our water bills to clean up the rivers while water company execs enjoy £millions in bonuses. To my mind this lends weight to my oft-repeated suggestion we are now well into the post-democratic oligarchic era so civil unrest on an unprecedented scale cannot be far away.
I’m afraid I’m approaching the stage where I hope that civil rest actually does occur.
How much more are we prepared to take from Westminster governments of any hue.
Hi Richard,
HMRC have a process known as simple assessment which was introduced for circumstances such as this, which removes the requirement to file tax returns.
https://www.litrg.org.uk/tax-guides/tax-basics/what-simple-assessment
Wait until the penalties flow…..
Richard,
You are not correct in stating that HMRC will require a taxpayer to complete a self assessment if they have only a state pension.
As of 2016-17, HMRC introduced “simple assessment” which means that after the financial year, HMRC will calculate the balance due on their state pension minus their Personal Allowance. The taxpayer will then receive the “simple assessment” bill (PA302) and make payment by 31 January (the same date as Self Assessment)
This is automatically done by the PAYE system so no human intervention required.
https://www.litrg.org.uk/tax-guides/tax-basics/what-simple-assessment
https://www.gov.uk/simple-assessment
Why does no one believe you?
Sorry Richard I’m a bit confused by your reply there, I just did a quick look on the gov.uk site quoted and saw this:
“ You may get a Simple Assessment letter if you:
• owe Income Tax that cannot be automatically taken out of your income
• owe HMRC £3,000 or more
• have to pay tax on the State Pension
Perhaps you could enlighten me.
Note the word ‘may’
The legal obligation is to declare
Would you take the risk of not doing so when the fines are so heavy?
Will they accept the fact that they could have acted as reasonable excuse?
Unfortunately, calling something “simple assessment” doesn’t make it straightforward. Rather, it’s old-style HMRC assessment with all the incumbent appeal, interest and penalty provisions. And in this case it’s a sticking plaster to cover DWP’s intransigence.
Three immediate and interconnected concerns:
– is HMRC resourced to handle the additional enquiries that people getting a ‘simple assessment’ will generate;
– instinct suggests that people whose only income is SP will have had little to do with the tax system until they get a ‘simple assessment’. What support will there be for them;
– SP is taxable on the entitlement basis rather than receipts basis. How will HMRC handle this technical issue.
Pedant’s Corner.
HMRC does not operate PAYE. That’s the responsibility of the employer or pension provider. From personal experience, DWP have always taken the attitude that they want nothing to do with a PAYE scheme for the SP, or benefits more generally.
DWP could solve the problem that Richard sets out by accepting their responsibilities, operating a PAYE scheme on the SP and treating State pensioners as, ahem, “customers” rather than inconveniences.
I have an 83 year old father in law struggling to get a dementia diagnosis and I’m eligible to retire myself (some hope of that). I’ve been stuck in NHS waiting rooms with my partner who eventually had an operation and whom was then cast out of the hospital without any after care regime. I’ve been subject to austerity and seen my wages and pension reduced by 25% over 13 years and find my job nigh on impossible to do at any rate that makes any difference. And as I am in the public sector I’ve seen the effects of this on people worse off than myself.
My overwhelming impression of my country is that it wants to eat me alive, if not kill me. Quite frankly I continue to go to the gym in the hope that I’ll just keel over one day and that will be it.
This is not a nice place to linger – even if you have earned it or have little choice.
‘No such thing as society’ is a lie. There was. And our politicians have just about destroyed it.
Your presentpersonal experiences are deepky moving and the social systemic callousness you are experiencing is beyond unjust.
I can no longer bring myself to call the overheated narrow minded greedy sleazy types who are gleefully commiting democide for personal pleasure and profit either politicians or entrepreneurs. They are carpetbaggers.
Now daily fluctuating between blinding rage and overwhelming grief at the unrelenting tragedy the UK has become.
The Economy isnt working
https://www.bbc.co.uk/news/uk-england-london-67126160
It gets worse – and ‘Care’ is a regulated sector
https://www.bbc.co.uk/news/uk-67151672
We often hear about how businesses are swamped by paperwork when there are tax changes or new health and safety/employment law requirements. I very much sympathise with small businesses in this regard. Surely no sensible person would impose similar problems on some of the most vulnerable in society. Wealthy pensioners will already be submitting tax assessments, so are not affected by the proposals.
The Tories really are a heartless bunch.
This is the government web page for the simple tax assessment. Having grappled with the standard tax assessment over the years, I can guarantee you that anyone who has never had to do a tax return will find this quite daunting.
https://www.gov.uk/check-simple-assessment
Check your Simple Assessment tax bill
_________________________________________
You may get a Simple Assessment letter from HM Revenue and Customs (HMRC) if you:
* owe Income Tax that cannot be automatically taken out of your income
* owe HMRC £3,000 or more
* have to pay tax on the State Pension
HMRC will send your Simple Assessment letter either:
by post
to your personal tax account, if you have one
Understanding your tax bill
_____________________________
Your letter will show:
* your taxable income (for example, income from pay, pensions or state benefits)
* any Income Tax you’ve paid
* the tax you owe
Check the amounts in your letter match those in your records, for example in your P60, bank statements or letters from the Department for Work and Pensions (DWP).
If you get state benefits paid every 4 weeks, work out the total paid in a year by multiplying your regular payment by 13 (not 12).
You may be able to use the HMRC tax checker to estimate how much tax you should have paid in the previous tax year.
If you do not understand your calculation, you can get advice from HMRC or a professional, for example a tax advisor or accountant.
And there’s much more…..
Agreed
And presumably this will come out of the blue.
How many pensioners will:
– have any experience of interactions with HMRC;
– understand concepts like the personal allowance and tax rates;
– be able to work out their taxable SP (taxable on the accruals basis);
– have made any provision (to the extent that they are able) for a tax liability?
The more I have looked at this the more convinced I am that this is fake news – not by Richard, several newsapers have reported it after it was announced by Steve Webb of LPC. (ex Lib Dem politician).
The number of pensioners who will be affected by this in 2024 is going to be tiny, because very very few people will receive a STATE pension of more than £240 per week from April 2024 as their sole income.
Those state pensioners who receive additional PAYE income, like an occupational pension, will be unaffected (except for having to pay more tax) as they will have a tax code that can be adjusted to recover the tax during the year.
Unless the tax free allowance is increased in 2025 there will be a lot of pensioners affected, but not yet.
I wonder what his motivation was?
I wish I shared your view: pensioner tax is already a nightmare and it was right to draw attention to the fact that it is only getting worse.
And what about pensioners in receipt of bank interest which is gettng bigger as well?
It may be possible to claim that the amount of tax owing is de minima, which I have done in the past, but it still requires working it out and interacting with HMRC,
I’ve a feeling there will be scams about where “accountancy advisors” offer the facility to submit tax returns on pensioners’ behalf.
At one time it was fairly safe to assume mpst people would not be taxanle on these sums due to additional savings allowances, but with rates up fifty fold, I agree that can now be a rash assumption.
Anyone with £20,000 saved and a keen eye on rates can create a tax bill now, unless they use ISAs. Masses of people are going to be caught out by this. And yes, I know savings are skweded but not that much.
Nigel
I may be guilty of stereotyping here but I think it quite unlikely that a pensioner whose only income is the state pension will have enough savings income to need to declare it. Again, possible, but the figures will be nowhere near 2 million pensioners.
Hunt’s motivation? Time-bomb, a little present waiting to go off under the next Chancellor, who as we know isn’t likely to be him or anyone he wants to see having an easy ride. They (or perhaps he’s thinking she) will be met with storms of criticism if they/she ‘irresponsibly’ increase allowances or don’t thereby increasing taxes on many pensioners. The grey vote is traditionally Tory. How many of that number would understand their taxes were going up because of shenanigans by a departed Tory chancellor, were that to be the case? Not too many, I’d think. They’d blame the chancellor of their present, and that might suit Hunt admirably. All part of salting the earth.
You may be right…
Things are already happening.
I have a small personal pension which has been paid to me gross for the last 16 years. I paid the tax through my Self employed self assessment return.
In May this year the quarterly payement was reduced by 50%. I contacted the company who would only say “It is because of HMRC. Ask them” . Why 50% anyway? I am a standard rate tax payer.
I’m waiting to see what my P60 says next year…
A relative also had a reduction in the amount paid from a personal pension. Her state pension plus this one used to be under the personal allowance level so she has never paid tax. Nor do we think it is due this year. Again she was told to take it up with HMRC.
How much work, on all sides, is it going to take to sort these things out?
And it feels so disempowering to just have the money retained without any notification. In both cases it is not critical. But for many it will be, especially if not notified till the end of the year.
You should have had a notice of coding explains this. Mind you, mine never make any sense and I always sort it out through a tax return.
Neither of us have received anything.
I will sort it with my tax return as I have employed and self-employed income plus pension income.
My relative has had nothing from HMRC as yet.
Would you believe I’ve just had an email said to be from HMRC telling me I have 100 days to go to get my self-assessment tax return in and pay the money!
Fortunately I know to keep letters from HMRC and have the one that says I don’t need to send in a self-assessment tax return from 2021.