Retirees who have been caught in the crossfire of frozen tax thresholds and rising state pensions could see their liabilities erased.
Those receiving state pension find themselves in a tricky situation as the triple lock guarantees annual increases in their pension income, which is inching ever closer to the frozen personal tax allowance of £12,570.
This could result in many people paying income tax on a benefit alone in their retirement, irrespective of any other pension income they may or may not have.
However, HMRC has disclosed to The Telegraph that it is prepared to waive some tax bills for potentially hundreds of thousands of individuals in this predicament. The department stated it “will not pursue hundreds of thousands of pensioners for tiny amounts” as it would be too costly to collect.
For most working individuals, income tax is deducted directly from their paycheque through tax codes on the Pay As You Earn system. This makes tax collection straightforward and cost-effective, regardless of the amount owed.
However, state pension cannot be taxed at source and collected automatically. In these instances, HMRC must send demand letters informing the taxpayer of the amount due, also known as a simple assessment letter.
Approximately 140,000 pensioners have been stung by tax demands this year, with estimates suggesting around 400,000 could be next in line as forecasts roll in.
An HMRC spokesperson told the press: “We will not normally issue simple assessments for tax that would cost more to collect than is owed. That would not be a good use of public funds.”
At present, there’s no hard and fast rule on the exact figure for this possible tax forgiveness, as it purportedly hinges on individual circumstances and the costs involved in retrieving the dues.
Should the state pension swell by 4.6% come next April experts anticipate a 4.5% hike the total pension pot would soar to £12,572, tipping over the personal income tax threshold and potentially triggering a 40p tax levy.
Cemented at £12,570 until 2028, the personal allowance limit is surely set to be outstripped by the full state pension value due to the ‘triple lock‘ guarantee promising an uprate each spring.
At least one million pensioners rely solely on the state pension and benefits, while another 1.7 million pocket the full amount of the new state pension, DWP data shows.
However, some industry voices are bracing for upset, with Nishi Patel from N-Accounting suggesting that any move by HMRC to disregard genuine tax is bound to ignite controversy, stating: “It would be outrageous if HMRC decided to write off actual amounts of tax owed as many taxpayers would view it as unfair.”
Guy Smith, from Independent Tax, commented: “In practice, HMRC might take a commercial decision to quietly decide not to pursue small amounts of tax from pensioners, but again if other taxpayers were to discover that, they would want the same latitude.”
