HM Revenue & Customs (HMRC) is set to distribute a record number of unexpected tax bills this year, with a rising amount of retirees getting entangled in the tax system. The tax authority disclosed plans to send out 1.4 million simple assessments for the 2024-2025 tax year, marking an 80,000 increase from the prior year’s 1.32 million. This figure is the highest ever recorded and nearly double the average annual total over the past seven years.
Simple assessments, which do not require individuals to complete a self-assessment form, are being utilized to collect tax from pensioners or workers who have underpaid taxes. This approach comes following reports of numerous individuals receiving unexpected letters from HMRC due to a new tax regulation.
HMRC attributed the surge in simple assessments to the freezing of income tax thresholds, resulting in more pensioners being encompassed within the tax structure. Experts have warned that these tax bills can catch retirees off guard, particularly as the threshold freeze is expected to persist until at least 2028.
While income tax thresholds have remained stagnant despite inflation, the state pension’s “triple lock” has bolstered retirees’ weekly income, causing more individuals to fall into the tax system or higher tax brackets. Most retirees receive income from private pensions, with taxes automatically deducted through their tax codes. However, retirees without private pensions may receive a simple assessment tax bill.
Recent data from HMRC indicates a significant rise in automatically assessed taxpayers for underpaid taxes 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 number.
Jon Greer from Quilter noted that simple assessment letters are a clear example of the impact of stealth taxes, driven by frozen tax thresholds and increased state pensions leading to more tax obligations for older individuals. Sir Steve Webb, a former pensions minister, highlighted the growing number of pensioners being drawn into the tax net due to prolonged threshold freezes.
Separate figures from HMRC reveal that over 500,000 claims for overpaid tax on pension withdrawals have been processed since the introduction of “pension freedoms” rules in 2015. This rule change allowed savers to withdraw varying sums from their pensions, resulting in overpayments due to emergency tax rates.
The Treasury has assured its commitment to supporting pensioners, highlighting increases in basic and new state pensions. They stated that pensioners will receive income boosts, with millions seeing their pensions rise as part of the triple lock guarantee.