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More than half a million retirees will face income tax bills for the first time since retirement when the state pension rises by 8.5 percent on Monday.
And up to 1.6 million extra pensioners will pay income tax over the next four years as a result of the government’s secret tax heist, according to dire predictions from the House of Commons Library.
The new state pension will rise by £902.20 a year from April 8, under the government’s ‘triple lock’ promise.
This guarantees that the state pension will increase at the highest rate of inflation, wage growth or 2.5 percent.
The full new state pension – paid to those who reached retirement age after 2016 – will be £11,502.40 per year.
Tax trap: Up to 1.6 million extra pensioners will pay income tax over the next four years as a result of the government’s secret tax heist, according to gloomy official forecasts
But this pushes hundreds of thousands of pensioners closer to the upper limit of their personal allowance, which has been frozen at £12,570 until 2028.
When other pension income is added, many will become liable to pay taxes for the first time.
But a catch in the way tax is charged means thousands could be caught out with deferred bills, causing widespread confusion, experts warn.
To navigate the tax minefield and help you determine whether you should put money aside, we asked retirement and tax experts to break down what you need to know.
Do I owe tax on my state pension?
Anyone receiving the full flat rate under the new state pension – £11,502.40 per year from next week – will not have to pay tax on this income.
This is because their payout remains below the personal allowance, which is frozen at £12,570 until 2028. This is the amount you can earn before taxes are charged.
However, some people on an old state pension receive a state pension greater than £12,570 (including income-related top-ups), in which case they will have to pay tax on this money.
This means that retirees will not see the full increase and will have to pay 20 percent of their income above the threshold to the tax authorities.
Steve Webb, former Pensions Secretary and now a partner at consultancy LCP, says HM Revenue & Customs will never deduct tax directly from your state pension payments. You may need to save money and pay taxes at a later date.
Who will be most affected?
Anyone with a state pension and a small corporate or private pension is most at risk of having to pay tax for the first time due to frozen thresholds, Mr Webb says.
The personal allowance threshold has been frozen since 2021, meaning that from next week pensioners can receive an income of just £1,067.60 per year – or £89 per month – on top of their full state pension, before income tax comes into effect. the state pension will use a record 92 percent of their tax-free assets.
The full new state pension will be £11,502.40 a year, putting many pensioners close to the limit of their personal tax exemption, which has been frozen at £12,570 until 2028.
Ros Altmann, also a former Pensions Minister, says: ‘Most people who have to pay taxes will be poorer pensioners with little more than their state pension to live on.’
Also, hundreds of thousands of women who count on their marriage tax exemptions could be hit with a surprise bill next tax year.
A combination of frozen tax thresholds and rising state pensions means that many couples will no longer be able to take full advantage of the tax break.
The marriage allowance is a tax benefit that allows married couples where one spouse is a low earner to share their allowances.
If one partner earns at least 10 per cent less than the personal allowance – or no more than £11,310 from this month – and the other is a basic taxpayer, the lower earner can hand over 10 per cent of their unused tax allowance at no extra cost.
Many of the women who took advantage of this tax benefit may face tax bills because their income will be too close to the benefit.
How do retirees pay their bills?
Any pensioner who receives more than £242 a week will have to pay tax, but it will not necessarily be automatically deducted from their pension.
The government usually collects tax through the tax law applied to a private pension as this is classified as PAYE income.
This means that as your AOW pension increases, you may receive slightly less from your work or private pension.
This is because HMRC will never deduct tax from your state pension, so any tax owed would be charged to your personal pension via the PAYE system.
In this case, you may not need to do anything as your taxes should adjust automatically.
For those who do not have a personal pension and rely only on the state pension, the tax cannot be collected easily. In these cases HMRC will use a system known as ‘simple assessment’, whereby accounts are issued after the end of the tax year.
The tax authorities should send you a letter with the exact amount you need to pay and the bank details you can use to make the payment, Mr Webb says.
This should apply to women who take advantage of the marriage tax deduction and have to pay a bill.
Many will receive their tax bill the year after they receive their pension, so will be responsible for putting money aside each time they receive their state pension.
Give it back! Some people on an old state pension receive a pension of more than £12,570, in which case they have to pay tax on this money
For example, if your income becomes taxable for the first time in the 2024-2025 tax year, you will not receive a letter from HMRC until the summer or autumn of 2025.
You must make the payment no later than January 31 after the end of the tax year, or within three months after the simple assessment.
Payment must be made online through your personal tax account, by making a bank transfer or by sending a check.
HMRC bases the calculation for the simple assessment on information collected from the Department for Work and Pensions, employers and other organizations (such as banks and pension companies).
According to consultancy Low Incomes Tax Reform Group, it is important to carefully check the figures for the simple assessment calculation.
You can dispute the tax amount owed within 60 days of receiving the simple assessment.
If you have more complicated tax matters, you may need to file a tax return yourself. In that case, HMRC will notify you, says Robert Salter of accountancy firm Blick Rothenberg.
What if I don’t receive a letter?
Hundreds of thousands will be “totally unaware” of any liability, Ms Altmann warns.
She says: ‘They will probably never have completed a tax return in their lives. They then run the risk of being fined because they have not paid a small amount of tax that they did not even know about.’
If you owe tax for the first time, HMRC must write to you and tell you exactly how much you owe.
But there is a danger that they will not be able to contact you. Mr Salter says there is a risk of missing the letter if you have not informed HMRC of a recent change of address.
In this case, the tax authorities cannot inform you of the change in your tax status.
Those who do not pay their taxes on time could face automatic fines worth £100, as well as up to £1,600 in late payments and interest charges, he says.
What if I just can’t pay?
Because there is a one-year delay between when retirees receive their state pension and when the tax bill is due, there is a risk that many will be surprised by unexpected tax bills.
You may be able to set up a payment plan with HMRC if you cannot pay the tax in one go.
Mr Webb says HMRC will likely ask for a breakdown of your budget to see how tight money is.
“They probably won’t make an arrangement if they see that you have been on a foreign holiday, for example,” he says.
- Are you afraid that you will be faced with a tax bill? Email j.beard@dailymail.co.uk
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