State Pensioners Alerted to £665 Tax Bill by HMRC

More than 100,000 state pensioners are now paying income tax for the first time, adding to the frustration of millions who have lost their Winter Fuel Payments, which can be worth up to £300.

Frozen Tax Bands Push More Pensioners into Income Tax, Leading to Unexpected Bills

Because tax bands have been frozen, more pensioners are being pushed into paying income tax as their income increases each year. As a result, annual state pension rises may not help much for those losing money due to this "stealth tax."

According to a research conducted by ex-pensions minister Sir Steve Webb, a partner at LCP, the number of taxpayers facing tax demands averaging £665 has increased by 120,000 compared with two years ago, as reported by Express.

People are calling on the Government to fix the problem by unfreezing tax bands, but Chancellor Rachel Reeves has cautioned that there could be even more "tough times" ahead in the October 30 Budget.

This follows the removal of Winter Fuel Payments from around 10 million pensioners. Sir Steve stated: “The long-term freeze in the value of the tax-free personal allowance is dragging more and more people into the income tax net, including many pensioners. Where the tax due can be collected via a tax code on a wage or a private pension payment, then the taxpayer does not need to take any further action"

He added that if someone's income, from their state pension and investments, pushes them over the tax threshold, they might get an unexpected tax bill at the end of the year. More people are facing these bills each year, so it's important to plan ahead. While the average tax bill might be around £665, which doesn’t seem like much, it could still represent about three weeks' worth of pension, and some pensioners may struggle to pay it if their income is only slightly above the threshold.

HMRC Sees Rise in Surprise Tax Bills for Pensioners

Sir Steve found out from HMRC that more people are getting surprise tax bills each year. This happens when someone earns more than the personal allowance, but the tax can’t be taken directly from wages or private pensions. Nearly 700,000 people got these tax bills, with an average amount of £665, and the number of people affected increased by 120,000 between 2021 and 2023.

HMRC sends out a demand for payment using information on state pension payments as well as investment income from banks and other financial facilities, once the bill is calculated.

Caroline Abrahams, charity director at Age UK, stated: “These numbers are high, and we are worried about how many older people this is affecting. Freezing tax allowances over a period when inflation has been surging means more older people are having to start paying income tax while others are facing higher tax bills.

“This is having a big impact on many with modest incomes—perhaps a small private pension on top of their state pension. The last thing we want is for older people who are already struggling to manage financially to have to start paying income tax. It is high time the government started increasing personal allowances again.”