HMRC has been sending out tax demands to over 300,000 individuals for sums that many consider trivial. Despite the growing concern over the efficiency and fairness of such practices, the tax office defends its position, highlighting its duty to collect all due taxes, no matter how small.
The tax office’s move to issue “simple assessments” has sparked debate, particularly regarding the cost-effectiveness of chasing small amounts. A record 1.32 million simple assessments were sent out in the 2023-24 tax year, with nearly a quarter of them being for £100 or less, and half for under £300, according to figures obtained through a Freedom of Information (FOI) request.
A Rise in “Simple Assessments” for Small Tax Demands
The increase in these tax demands follows a broader trend of fiscal drag, where frozen income tax thresholds push more individuals, especially pensioners, into the tax system. HMRC is now issuing simple assessments to collect underpaid taxes without requiring taxpayers to submit full self-assessments. While this approach is intended to streamline the process, it has led to a rise in people receiving unexpected bills for small amounts of money, a situation that has raised concerns over the overall cost and efficiency of tax collection.
In the 2023-24 tax year, HMRC issued 1.32 million simple assessments, a steep increase from previous years. Of these, 317,000 were for £100 or less, and 647,000 were for £300 or less. These figures are a significant rise from previous years, illustrating the growing number of people, particularly pensioners, being brought into the tax system. Experts argue that these small tax demands may cost more to process and collect than they actually raise, calling the system a waste of public resources.
Steve Webb, a former pensions minister and partner at pension consultancy LCP, expressed concern over the growing trend. According to Webb, “Far too many people are receiving demands for trivial amounts of money which in some cases probably cost more to collect and process than they raise in tax.” He called for the government to reassess whether the current system is creating unnecessary bureaucratic hassle for taxpayers and a waste of official time and effort.
Frozen Tax Thresholds and the Impact on Pensioners
One key factor behind the increase in simple assessments is the freezing of income tax thresholds, which has steadily pulled more pensioners into the tax system. With pensions rising but tax thresholds remaining the same, many pensioners find themselves owing small amounts of tax, despite assuming their incomes fell below the tax-free allowance.
For example, pensioners who rely solely on the state pension might not have considered themselves “taxpayers” in the past. However, the rise in the state pension and additional small income streams have pushed many into paying tax. As Ian Futcher, of wealth management firm Quilter, pointed out, this phenomenon is a result of “fiscal drag”, where incomes gradually increase while tax thresholds stay fixed. As more people tip over the tax threshold by modest amounts, the administrative burden increases for both individuals and HMRC.
This system has created a situation where pensioners who may have once been exempt from tax are now facing unexpected demands. Simple assessments, which do not require individuals to file a full self-assessment, are intended to make tax collection simpler, but they are increasingly being sent to people who do not consider themselves traditional taxpayers.
In response to criticism, HMRC has defended its actions, stating that it is legally required to collect all taxes owed to the Treasury, no matter how small the amount. However, as the system grows, it remains to be seen whether the current approach is truly the most efficient or fair way to collect taxes, particularly for those with modest incomes.
Despite these concerns, HMRC’s practices are unlikely to change in the short term. A Treasury spokesperson reiterated that the UK has one of the highest personal allowances among the G7 countries and that tax paid by low-income workers remains at historically low levels. However, with predictions suggesting that the number of simple assessments could exceed two million by the 2024-25 tax year, the debate over the cost and fairness of this practice is likely to continue.
