State pension warning as 400,000 Brits face unexpected HMRC bill

Pensioner looking concerned at letter

Hundreds of thousands of pensioners could be in for a shock as they may need to start budgeting for “unexpected” tax bills, experts have cautioned.

The state pension has seen an 8.5% increase this month, a change that aligns with the wage growth figures from September 2023, giving many retirees a financial uplift. However, this boost might inadvertently push around 400,000 individuals into higher income tax brackets.

The basic state pension now stands at £169.50 weekly, and the full new state pension at £221.20, equating to annual incomes of £8,814 and £11,502, respectively. Both are under the current personal tax allowance threshold of £12,570, but trouble brews for those who get an additional state pension on top.

Tax specialist Andy Wood from Tax Natives warns: “If your state pension is over £242 per week, you may face unexpected tax bills due to the frozen personal tax allowance. With an 8.5% increase in state pension from April, pensioners receiving over £242 per week may enter the tax net. The frozen tax threshold of £12,570 heightens the risk of unexpected tax demands.

“For example, those on the full new state pension will see a weekly rise from £203.85 to £221.20. This means an extra £902 per year. While it’s a boost, pensioners need to be aware of potential tax implications due to the fixed personal tax allowance threshold.”

He clarified: “HMRC may use a ‘simple assessment’ to notify pensioners of tax liability. This means you could receive a tax bill after the tax year ends. It’s crucial to be aware of this possibility to plan accordingly.” Tax owed on state pensions is not automatically collected as state pensions are paid in full before any tax deductions are made.

This results in HM Revenue and Customs (HMRC) utilising the “simple assessment” system. Under this scheme, the Department for Work and Pensions (DWP) informs HMRC at the end of the tax year about the total amount of state pension received by individuals.

If applicable, HMRC will contact the pensioner at the end of the tax year to inform them they have not paid the tax due on their state pension. The individual will then be required to make the tax payment before January 31 of the next financial year.

Pensioners who could be caught in this scenario are urged to strategize in advance to prevent exhausting their entire state pension within a single financial year, only to be slapped with a tax bill the next. It’s believed that approximately one fifth of these pensioners, equating to more than 400,000 individuals, might not have any other income source from which HMRC can obtain the outstanding tax.

Therefore, they may need to consider reserving some of their monthly state pension to ensure theres enough cash stashed away for a future tax demand. Adam Pope, a pension specialist at Spencer Churchill Claims Advice, highlighted: “Every year, the amount of money retirees get from the state pension goes up and brings them closer to having to pay income tax.”

He stressed the importance of keeping well informed about these adjustments as they influence the amount of money pensioners receive and whether they owe taxes. He warned further: “It’s a real worry that retirees might get bills for taxes they didn’t expect, especially if they only get the state pension. Getting advice from a legal expert is important to help them understand and plan for any unexpected tax issues.”

According to HMRC statistics, the number of those aged 65 and over paying income tax surged by 10% from 7.73 million in 2022/23 to 8.5 million in 2023/24 following the 10.1% state pension increase in April 2023.