Hundreds of Thousands of Pensioners Hit with Tax Bills

Over 650,000 pensioners across the UK are set to face income tax charges for the first time since retiring. This move comes as a result of recent changes in state pension increases and tax thresholds.

Starting from this week, an unprecedented shift will see over half a million state pensioners begin to pay income tax, marking a first for many. The Institute for Fiscal Studies has highlighted a stark increase in the number of over-65s paying tax on their income – from roughly 4.9 million in 2010 to an estimated 8.5 million from the 6th of April.

This dramatic rise is primarily due to the state pension increasing in alignment with inflation, while the income tax threshold remains frozen at £12,570 until 2028. With the state pension set to rise by 8.5% this week to £11,502, pensioners with any additional yearly income over £1,068, such as from a private pension, will find themselves liable for income tax.

Experts from the law firm Lane Clarke & Peacock estimate that this adjustment will introduce around 650,000 pensioners into the bracket of taxable income earners for the very first time.

Louise Jenkins, a tax partner at Alvarez & Marsal, voiced concerns over the situation, acknowledging the benefit of the pension rate increase but warning of the tax implications due to stagnant personal allowances. “This will result in pensioners becoming liable to pay tax and having the administration complexities that go with that,” she explained.

While HMRC assures that pension income exceeding the personal allowance will be handled through a PAYE scheme, eliminating the need for self-assessment, real-world complications may force many pensioners to navigate tax codes and potential overpayments manually. The process is often described as time-consuming and frustrating, especially when dealing with HMRC’s notoriously difficult helplines.

A Mixed Bag for Pension Types

Clare Moffat from Royal London explained how different types of pensions could affect tax liabilities. Those with defined benefit pensions or annuities may find themselves paying more tax due to fixed incomes. Conversely, individuals who have opted for pension drawdown schemes might have the flexibility to adjust withdrawals and stay within the personal tax allowance threshold.

Marriage Allowance – A Double-Edged Sword

An unexpected tax complication comes from the marriage allowance, which could inadvertently push many pensioners above the personal allowance limit. This aspect requires careful consideration to avoid unexpected tax bills.

Calls for Clarity and Policy Reevaluation

The need for clear communication from the government and the Department for Work and Pensions (DWP) has never been more critical, with experts urging for detailed guidance on these new tax implications for the 12 million state pension recipients. Additionally, charities like Age UK are calling on the government to unfreeze personal allowances and reconsider its approach to safeguard pensioners against undue financial strain.

Government Stance

In response to the upheaval, a government spokesperson emphasised that pensioners solely reliant on the new state pension would remain exempt from income tax, provided they haven’t deferred or are receiving protected payments. They reassured that HMRC would continue to support those unable to use online services or deemed vulnerable.