HM Revenue & Customs (HMRC) is set to issue a record number of unexpected bills this year, with a rising number of pensioners getting entangled in the tax system. The tax authority announced that they will send out 1.4 million simple assessments for the 2024-2025 tax year, marking an increase of 80,000 from the previous year’s 1.32 million. This figure is the highest ever recorded, almost double the average annual total over the past seven years.
Simple assessments will be used for tax collection without requiring taxpayers to complete a self-assessment form, which is typically used for pensioners or workers who have not paid enough tax. This development comes after reports of thousands of Brits receiving unexpected letters from HMRC due to a new tax rule.
HMRC attributed the surge in simple assessments to the freeze on income tax thresholds, which has brought more pensioners into the tax system. Experts have warned that these tax bills can catch pensioners off guard, as many retirees are affected by the threshold freeze, which is expected to continue until at least 2028.
While income tax thresholds have remained stagnant despite inflation, the state pension “triple lock” has increased retirees’ weekly income, pushing more individuals into the tax system or higher tax brackets. Most retirees receive income from private pensions, with tax deductions automatically taken from their income. However, those without private pensions may receive a simple assessment tax bill.
HMRC data shows a significant rise in taxpayers being automatically assessed for underpaid tax over the past four years. In 2021-2022, when income tax thresholds were frozen, HMRC issued 675,000 simple assessments, less than half of the current number.
Jon Greer from Quilter highlighted how frozen tax thresholds and higher state pensions are leading to more tax liabilities for older individuals, catching many off guard. Sir Steve Webb, a former pensions minister, noted that the freeze on personal tax thresholds continues to draw more pensioners into the income tax net each year.
Separate figures from HMRC reveal that over 500,000 claims for overpaid tax on pension withdrawals have been made since the introduction of “pension freedoms” in 2015. This policy allowed savers to withdraw varying amounts from their pensions, resulting in many overpaying due to HMRC’s system assuming one-off withdrawals would be regular.
The Treasury has pledged to support pensioners by increasing the basic and new state pension and ensuring a boost to pensioners’ income in the upcoming years.
