HM Revenue & Customs (HMRC) is set to issue a record number of unexpected bills this year, with a growing number of pensioners getting entangled in the tax system.
According to the tax authority, they will be sending out 1.4 million simple assessments for the 2024-2025 tax year, which marks an increase of 80,000 from the previous year’s 1.32 million. This figure represents the highest number ever recorded and is nearly double the typical annual total over the past seven years.
Simple assessments are a method used by HMRC to collect tax without requiring the taxpayer to complete a self-assessment form, which is usually used for individuals who have underpaid tax, including pensioners. This comes after reports of thousands of Britons receiving surprising letters from HMRC due to a new tax rule.
HMRC has attributed the surge in simple assessments to the freeze on income tax thresholds, which has resulted in more pensioners being brought into the tax system.
Experts have warned that these unexpected tax bills can catch pensioners off guard, particularly due to the impact of frozen tax thresholds and increased state pensions, which are set to continue until at least 2028.
While income tax thresholds have remained stagnant despite inflation, the rise in state pension income under the “triple lock” system has pushed more retirees into higher tax bands. Most retirees receive income from private pensions, where tax is automatically deducted through their tax code. However, those without private pensions may receive a simple assessment tax bill.
Recent HMRC data shows a significant uptick in the number of taxpayers being automatically assessed for underpaid tax over the past four years. In the year 2021-2022, when income tax thresholds were frozen, HMRC issued 675,000 simple assessments, less than half of the current figure.
The increase in the use of simple assessments reflects the growing number of pensioners being drawn into the tax system, as the tax office deems these assessments suitable for straightforward calculations where there is sufficient information on the taxpayer’s income.
Experts in the field, such as Jon Greer from Quilter, emphasize that the rise in simple assessments is a result of stealth taxes, with frozen tax thresholds and higher state pensions creating more tax liabilities for older individuals.
Former pensions minister Sir Steve Webb, now a Partner at pension consultants LCP, highlights that the long-term freeze on personal tax thresholds is dragging more pensioners on modest incomes into the 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” rules in 2015. This reform, allowing savers to withdraw sums from their pensions, led to many pensioners overpaying due to an emergency tax rate assumption by HMRC.
The Treasury has pledged to support pensioners by increasing the basic and new state pension by 4.1% in April, providing a boost of up to £470 to income in 2025-26. The commitment to the triple lock ensures that millions will see their pension rise by up to £1,900 during this parliament.
