Former pensions minister Steve Webb has warned that hundreds of thousands of state pensioners could face surprise tax bills next year due to the expected 8.5% rise in the state pension under the triple lock guarantee. The increase, combined with a freeze on income tax thresholds, is likely to drag more pensioners into the income tax net.
According to Webb, now a partner at LCP, the full new state pension would rise to £221.20 per week, or £11,502 per year, from April. With the personal income tax allowance frozen at £12,570, those receiving the full new state pension will have only £1,068 of their allowance remaining for other income. Anyone with a state pension over £242 per week will owe some tax.
The state pension is paid gross, and tax is usually collected through workplace pensions or earnings. However, for pensioners with no other income, there is no automatic mechanism for HMRC to collect the tax. These individuals may not realise they owe tax until they receive a demand from HMRC, potentially after the end of the tax year.
Official statistics show that over 2.3 million pensioners had a state pension of £195 or more per week in November 2020. After subsequent increases and the expected 8.5% rise, almost all of these would exceed the tax threshold. Webb estimates that around 400,000 pensioners with no other income sources are at risk of unexpected tax bills.
HMRC will write to affected pensioners after the tax year ends, requiring payment by 31 January. There are concerns that some may mistake the letter for a scam, as they have not previously dealt with HMRC or filed tax returns. Webb advises pensioners to set aside part of their state pension to cover potential tax liabilities.
