More than half a million pensioners will be hit with income tax bills for the first time since retiring when the state pension rises by 8.5 per cent on Monday.
And over the next four years, up to 1.6 million more pensioners will be paying income tax as a result of the Government’s stealth tax heist, according to bleak forecasts from the House of Commons Library.
The new state pension is rising by £902.20 a year from April 8, under the Government’s ‘triple lock’ pledge.
This guarantees that the state pension will rise by the highest of inflation, wage growth or 2.5 per cent.
The full new state pension — paid to those who reached pension age after 2016 — will be £11,502.40 a year.
Tax trap: Over the next four years, up to 1.6 million more pensioners will be paying income tax as a result of the Government’s stealth tax heist, according to bleak 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 retirement income is added in, many will become liable to pay tax for the very first time.
But a catch in the way tax is levied means thousands could be caught out by delayed bills, causing widespread confusion, experts warn.
To navigate the tax minefield and help work out if you will need to set money aside, we’ve asked pension and tax experts to break down what you need to know.
Will I owe tax on my state pension?
Anyone receiving the full flat rate under the new state pension — £11,502.40 a year from next week — will not have to pay any tax on this income.
This is because their payout will remain below the personal allowance, which is frozen at £12,570 until 2028. This is how much you can earn before any tax is liable.
However, some people with legacy state pensions will receive a state pension that is greater than £12,570 (including earnings-related top-ups), in which case they will have to pay tax on this money.
This means pensioners will not see the full increase and will have to hand 20 per cent of any earnings above the threshold to the taxman.
Steve Webb, a former pensions minister and now partner at consultancy LCP, says HM Revenue & Customs will never deduct tax directly out of your state pension payments. The onus may be on you to keep money aside and pay tax at a later date.
Who will be most affected?
Anyone with a state pension and a small company or private pension is the most likely to be dragged into paying tax for the first time as a result of frozen thresholds, says Mr Webb.
The personal allowance threshold has been frozen since 2021, which means, as of next week, pensioners can receive an income of just £1,067.60 a year — or £89 a month — in addition to their full state pension before income tax kicks in. The state pension will use a record 92 per cent of their tax-free allowance.
The full new state pension will be £11,502.40 a year, which pushes many pensioners close to the limit of their personal tax allowance, which has been frozen at £12,570 until 2028
Ros Altmann, also a former pensions minister, says: ‘Most of those tipped into tax 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 allowances could be hit with a surprise bill next tax year.
A combination of frozen tax thresholds and rising state pensions mean that many couples will no longer be able to benefit fully from the tax break.
The marriage allowance is a tax break 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-rate taxpayer, the lower earner can hand over 10 per cent of their unused tax allowances at no extra cost.
Many of the women who have relied on this tax break could face tax bills, because their earnings will be too close to the allowance.
How do pensioners pay their bills?
Any pensioner receiving more than £242 a week will have to pay tax, but it may not necessarily be deducted automatically from their pension.
The government typically collects tax through the tax code applied to a private pension, as it is classed as PAYE income.
This means that as your state pension increases, you may begin to receive a little less from your workplace or private pension.
This is because HMRC will never deduct tax from your state pension, so any tax due would be levied on your personal pension via the PAYE system.
In this case, you may not need to do anything, as your taxes should automatically be adjusted.
For those who do not have a personal pension and rely only on the state pension, the tax cannot easily be collected. In these cases, HMRC will use a system known as ‘simple assessment’, where bills are issued after the end of the tax year.
The taxman should send you a letter with the exact amount of money you need to pay and bank details for you to make the payment, Mr Webb says.
This should apply to women using the marriage tax allowance with a bill to pay.
Many will receive their tax bill the year after they have received their pension, and so will be responsible for setting aside money each time they receive their state pension.
Hand it back! Some people with legacy state pensions will receive a pension greater than £12,570, in which case they will have to pay tax on this money
For example, if your income becomes liable to tax for the first time in the 2024-25 tax year, you will not receive a letter from HMRC until summer or autumn in 2025.
You must make the payment by January 31 following the end of the tax year, or within three months of the simple assessment.
Payment must either be made online via your personal tax account, by making a bank transfer or by sending a cheque.
HMRC bases the calculation for the simple assessment on information gathered from the Department for Work and Pensions, employers and other organisations (such as banks and pension companies).
It is important to check the figures on the simple assessment calculation carefully, according to the Low Incomes Tax Reform Group, a consultancy.
You can challenge the amount of tax due within 60 days of receiving the simple assessment.
If you have more complicated tax affairs, you may have to file a self-assessment tax return, in which case HMRC will notify you, says Robert Salter, of accountancy firm Blick Rothenberg.
What if I don’t get a letter?
Hundreds of thousands will be ‘totally unaware’ of any liability, warns Ms Altmann.
She says: ‘They will probably never have filled in a tax return in their life. They are then at risk of being hit with fines for not paying a tiny amount of tax they didn’t even know about.’
If you do owe tax for the first time, HMRC should write to you and tell you exactly how much you owe.
But there is a danger that they are unable to get in touch with you. Mr Salter says there is a risk you may miss the letter if you have not notified HMRC of a recent change in address.
In this case, the taxman will be unable to notify you of the change in your tax status.
Those who fail to pay their taxes on time could face automatic penalties worth £100, as well as up to £1,600 in late payment and interest charges, he says.
What if I just can’t pay?
As there is a one-year delay between when pensioners receive their state pension and when the tax bill is due, there is a risk that many will get caught out by surprise tax bills.
You may be able to set up a payment plan with HMRC if you are unable to pay the tax in one go.
Mr Webb says that HMRC is likely to ask for a breakdown in your budget to see how tight money is.
‘They are unlikely to set up an arrangement if they see you’ve been on foreign holidays, for example,’ he says.
- Are you worried you could face a tax bill? Email j.beard@dailymail.co.uk
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