HM Revenue & Customs (HMRC) is set to issue a record number of unanticipated bills this year, with a growing population of retirees being ensnared in the tax system.
According to the tax authority, 1.4 million simple assessments will be sent out for the 2024-2025 tax year, marking an 80,000 increase from the previous year’s 1.32 million. This figure represents the highest ever recorded and is nearly double the average annual total over the past seven years.
Simple assessments will be utilized for tax collection without requiring individuals to complete a self-assessment form, a process typically used for pensioners or employees who have underpaid taxes. This development comes in the wake of the revelation of a significant number of Britons receiving unexpected letters from HMRC due to a new tax regulation.
HMRC has attributed the surge in simple assessments to the freezing of income tax thresholds, which has trapped more retirees within the tax net. Experts have warned that these tax bills can catch pensioners off guard, with many falling prey to the effects of the threshold freeze, slated to persist until at least 2028.
While income tax thresholds have remained stagnant amid inflation, the state pension’s “triple lock” mechanism has bolstered weekly incomes for retirees, resulting in a higher number of individuals being pushed into the tax system or elevated tax brackets. Although most retirees receive income from private pensions, which are subject to automatic tax deductions through their tax codes, those without private pensions may receive a simple assessment tax bill.
HMRC data shows a notable rise in the automatic assessment of taxpayers for underpaid taxes over the past four years. In the 2021-2022 period, when income tax thresholds were frozen, HMRC issued 675,000 simple assessments, less than half the current number.
These assessments are issued when HMRC deems the tax calculation straightforward and possesses adequate information about the taxpayer’s income. The increasing use of simple assessments reflects the rising number of pensioners brought into the tax system.
Jon Greer, from Quilter wealth management firm, highlighted that simple assessment letters are a glaring example of stealth taxes in action, attributing the surge to frozen tax thresholds and increased state pensions leading to more tax obligations for older individuals. Sir Steve Webb, a former pensions minister and current Partner at LCP pension consultants, emphasized that the prolonged freeze on personal tax thresholds is drawing more retirees with modest incomes into the income tax domain.
Separate HMRC figures reveal that claims for overpaid tax on pension withdrawals have surpassed 500,000 since the advent of the “pension freedoms” rules in 2015. This reform, permitting savers to withdraw varying amounts from their pensions, resulted in emergency tax rates, causing many pensioners to overpay, with retirees recovering nearly £1.5 billion in overtaxed amounts.
A Treasury spokesperson assured that efforts are in place to support pensioners’ financial well-being, with increases in basic and new state pensions aiming to enhance retirees’ incomes in the upcoming years. The commitment to the triple lock ensures that millions will benefit from pension rises during this parliamentary term.
