Hundreds of thousands of pensioners have been hit with unexpected tax demands after being caught in a trap of frozen income tax thresholds and triple-lock pensions.
HMRC issued some 1.32million ‘simple assessments’ to pensioners in the 2023/24 tax year, up 74 per cent from the year before, dragging more taxpayers into taxable thresholds in a phenomenon known as ‘fiscal drag’.
The personal allowance and higher tax band were frozen in March 2021, and extended by two years in 2022 until 2027/28.
Labour vowed not to unfreeze the thresholds if elected to power and, under Chancellor Rachel Reeves, has kept its promise – plunging pensioners into further financial misery after she stripped away winter fuel payments.
Simple assessments are carried out by the tax office on people with ‘relatively straightforward tax affairs’ – including those with income generated from state and private pensions, benefits and income from savings and investments.
It calculates whether tax has been over or underpaid based on data from banks and building societies, as well as the DWP.
Simple assessments save pensioners the headache of having to complete a self-assessment tax return – but can deliver a nasty surprise to those who do not believe their income exceeds the personal allowance of £12,570.
The freezing of income tax thresholds since 2022 means more pensioners have unwillingly found themselves drawn into a tax trap as their state pension has risen each year thanks to the triple lock.
Under Chancellor Rachel Reeves (pictured), Labour has kept its promise not to unfreeze income tax thresholds – meaning more pensioners will find themselves liable for tax as the state pension increases
It guarantees that the state pension will rise by either average earnings growth, inflation as dictated by the Consumer Prices Index, or 2.5 per cent – whichever is highest.
The state pension rose to £230.25 or £176.45 a week for the ‘new’ and ‘old’ state pensions – the former for those who retired after April 2016 – as of April.
But as a result, pensioners’ average income has risen while the tax thresholds have not – dropping thousands of Brits into tax-paying territory, often without notice before a brown HMRC envelope drops through their door.
Many pensioners do not get by on the state pension alone – also gathering income from, for example, private pensions.
The figures on simple assessments, published by HMRC via a freedom of information request, show an average of 630,000 simple assessments were sent out each year between 2017/18 and 2022/23.
But 1,320,755 were issued in 2023/24 – up from 757,745 the year before – suggesting hundreds of thousands of pensioners have been pushed into an income tax bracket and ambushed by the taxman.
Personal allowance – the amount of income you can have tax-free – has been frozen at £12,570 since 2021, and a freeze on the thresholds was extended to 2027-28 by the Tories in the 2022 Autumn Statement.
Prior to the election, Labour said it would maintain the freeze until then if elected.
But tax experts say the trap is catching people off-guard – not least because they often believe they aren’t bringing in enough money to be liable for tax.
Steve Webb, a former pensions minister, now partner at pension consultants LCP, told the Telegraph ‘hundreds of thousands’ of the recipients of simple assessments were likely to be pensioners.
He added: ‘Many retired people on modest incomes may have hoped that their days of having to deal with HMRC were over, but the long-term freeze in tax thresholds has changed the situation.
‘Although most pensioners will still not have to file a tax return, hundreds of thousands will still get an unwelcome year-end tax demand from HMRC.’
The figures on simple assessment were obtained by financial advisory firm Quilter, which has previously warned that rising inflation would likely push more pensioners into the tax trap by as soon as 2027.
Jon Greer, head of retirement policy at the firm, said: ‘This is yet another sign of fiscal drag in action. Millions are sleepwalking into the tax system through no fault of their own.
‘The sharp rise in simple assessments reflects how frozen tax thresholds and higher state pensions are creating more tax liabilities for older people. Many of them may not even realise they owe anything until HMRC’s letter arrives.
‘While simple assessments are meant to simplify tax collection, they can catch people off guard, especially pensioners who don’t complete a tax return and assume their income is below the tax-free threshold.
‘The government’s freeze on allowances is quietly swelling the tax base. Unexpected tax bills can be scary especially if you are already struggling with your finances.’
On a cautionary note, he added: ‘If you get one and don’t know what to do, the best course of action is to call HMRC to discuss your options. Do not bury your head in the sand.’
HMRC was contacted for comment.
