Millions of British pensioners are facing unexpected pension tax bills due to rising state pensions and unchanged income tax thresholds, a situation experts describe as a silent but growing consequence of fiscal drag. This subtle shift in the tax landscape is quietly affecting retirees who assumed their income would remain below the tax-free threshold.
According to reporting from GB News, the interaction between inflation-linked pension increases and frozen personal allowances has begun to reshape the fiscal reality for older citizens. Although the mechanics of this evolving pension tax issue remain largely unexamined in public debate, the financial impact is starting to draw broader scrutiny.
Growing Number of Pensioners Face Pension Tax Liabilities
New figures reveal that HM Revenue and Customs (HMRC) issued a record 1,320,755 simple assessments in the 2023/24 tax year. This marks a 74% increase over the 2022/23 figure of 757,745, and nearly triple the number recorded five years ago. The figures reveal a long-term upward trend:
- 2017/18: 486,340
- 2018/19: 711,390
- 2019/20: 593,637
- 2020/21: 582,211
- 2021/22: 675,442
- 2022/23: 757,745
- 2023/24: 1,320,755
This sharp rise is largely attributed to increases in the state pension, which are pulling more recipients above the personal income tax allowance. Many are unknowingly entering the tax system, unaware that their income now exceeds the threshold.
According to Jon Greer, head of retirement policy at Quilter, the situation is
Yet another sign of fiscal drag in action” where “millions are sleepwalking into the tax system through no fault of their own.
Fiscal Drag and Frozen Thresholds
The effect is amplified by the Labour Government’s decision to freeze tax thresholds until 2028, a move that has not been reversed by Chancellor Rachel Reeves. As inflation pushes incomes up, tax thresholds remain static, dragging more people into liability — even when their real purchasing power stays the same.
The sharp rise in simple assessments reflects how frozen tax thresholds and higher state pensions are creating more tax liabilities for older people. Many of them may not even realise they owe anything until HMRC’s letter arrives – Greer explained.
In many cases, state pensions are paid without tax deducted at source, while other income — such as from private pensions or part-time work — is taxed via PAYE.
HMRC attempts to balance the total liability through tax code adjustments, but these are not always accurate. This affects not only pensioners but also employees with fluctuating incomes, who may also receive simple assessments when their PAYE deductions fall short.
How Simple Assessments Work
Simple assessments are issued by HMRC when the authority believes it has sufficient data to calculate a person’s tax liability, avoiding the need for a full self-assessment return. These typically target individuals with underpaid tax, often due to changes in income that aren’t fully captured in real time by the tax system.
They can catch people off guard, especially pensioners who don’t complete a tax return and assume their income is below the tax-free threshold – said Greer.
While the system is designed to be efficient, the rapid rise in assessments highlights how more retirees — many on modest or fixed incomes — are being pulled into the tax net without realising it.
unexpected bills creating financial strain
This fiscal adjustment is placing increased pressure on older households.
The Labour Government’s freeze on allowances is quietly swelling the tax base – according to Greer,
Creating financial challenges for many who were not expecting to pay tax in old age.
For those receiving unexpected bills, Greer advises prompt action:
Unexpected tax bills can be scary especially if you are already struggling with your finances. If you get one and don’t know what to do, the best course of action is to call HMRC to discuss your options. Do not bury your head in the sand.
