HMRC is set to forgive tax bills for potentially thousands of state pensioners caught by the static tax thresholds. The tax authority has admitted it won’t chase pensioners for “tiny” tax amounts because it’s simply not cost-effective to do so.
Meanwhile, with income tax bands frozen until 2028 due to the previous Tory Government’s policies, hundreds of thousands of pensioners may soon find themselves taxed on their state pensions. Although Labour has not made clear if they would uphold the freeze on the tax threshold.
This year has already seen around 140,000 pensioners slapped with a tax bill, and projections suggest another 400,000 will join them in the taxing grip. However, Labour’s pledge to maintain the Triple Lock could see state pensions surge by another 4.5% next year.
And should pensions swell by an additional 4.6% subsequently, the state pension would inflate to £12,572 annually by April 2026. This is above the personal allowance threshold of £12,570 – which has also been frozen until 2028 – and would mean the state pension would be taxed. According to The Telegraph, this would see those living off the state pension only receive a tax bill of 40p.
Department for Work and Pension (DWP) figures show that around 1.7million people live off the state pension and benefits alone, with 1.7million receiving 100% of the new state pension. Under HMRC tax rules, Pay As You Earn (PAYE) taxpayer can have their tax code adjusted to represent the level of tax they are due to pay but, this cannot be done with the state pension as it cannot be taxed at the source.
This means HMRC have to chase up the amounts due through a simple assessment letter. However, the tax office confirmed it will “not pursue hundreds of thousands of pensioners for tiny amounts of tax” if the state pension exceeds the allowance.
An HMRC spokesman told The Mirror: “No-one will have to file a tax return because an increase in state pension takes them over the Personal Allowance. The majority of PAYE customers will have any tax owed collected via their tax code. Those who are not in PAYE or Self Assessment will be issued a Simple Assessment letter, which will inform them of any tax they need to pay.
“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.”
HMRC confirmed there was no set level and that it varied according to the circumstances and administrative costs involved. However, tax and pension experts and charities have urged HMRC to give more clarity on this amount – or should raise the personal allowance threshold.
Sir Steve Webb, a former Lib Dem MP said: “In some cases, these demands could be for just a few pounds or even pence, and HMRC needs to be clear at what point it decides sending such letters is a poor use of taxpayers’ money. It is hard to believe that collecting relatively small sums from hundreds of thousands of pensioners in this way is a sensible system.”
