With HMRC confirming it has plans to write off tax bills for thousands of pensioners, one expert has warned about the dangers this could bring
HMRC recently announced it has plans to write off the tax bills of some pensioners if the annual increase of state pension surpasses the frozen personal allowance. The combination of these two financial mechanisms could potentially see hundreds of thousands of pensioners paying a tax bill on their state pension income alone.
The tax office confirmed they won’t be sending demands to pensioners who owe “tiny” amounts, also known as de minis, simply because the administration costs would be too high to get any benefit from these taxes. However, managing director at Evelyn Partners shared his own concerns on this situation and explained how the Winter Fuel Payment changes will combine with this to make a potentially devastating financial future for some retirees.
Jason Hollands explained to The Mirror: “Even if HMRC do turn a blind eye to people who owe very small amounts of tax, such as £100 or less, the reality is a great many pensioners with quite modest retirement incomes are set to face an increasingly higher tax burden over the coming years where they also have even a very modest source of private pension income alongside their State Pension. These are the retirees who are also likely to be losing their winter fuel payments.
“In some cases, they may well find that they are required to complete self-assessment tax returns for the first time.” The expert suggested that a likely better answer to this dilemma would be to raise the personal allowance, which was frozen by the last government until 2028.
He explained: “The real solution would be to raise the Personal Allowance, which is dragging more and more people on lower incomes – both working and retired – into the web of income tax.” The Conservatives had addressed this potential issue in their manifesto ahead of the General Election with a pledge to adjust the personal allowance so it would never be lower than the state pension.
Jason explained that the personal allowance, which provides an annual sum that everyone can earn tax-free, is set at £12,570 until April 2028 unless Labour chooses to intervene. On the other hand, state pension rises annually through the triple lock formula, increasing every April by the higher of inflation, average wages rises or 2.5%.
The expert shared: “This means that even those who are retired and solely on the State Pension (currently £221.20 a week so £11,502.40 pa), could find their income exceeding the Personal Allowance and technically liable for income tax in the next couple of years as it continues to rise.”
Recent analysis predicts that the state pension rate will rise by 4.5% next April but the margin is so minimal that a 4.6% rise will exceed the personal allowance. This would result in annual state pension sitting at £12,572 and incur a tax bill of 40p.