Tax Threshold Freeze Sparks 1.3 Million HMRC Letters Requiring Immediate Action
The frozen personal allowance and rising state pension have dragged more individuals into the tax net, leading to a dramatic surge in correspondence from HM Revenue and Customs. Newly released figures reveal that over 1.3 million people have received tax demands due to this policy, with many required to respond by this Saturday.
Fiscal Drag Creates Unprecedented Tax Burden
Alarm bells are ringing across the nation as millions of Britons, including some of the country's lowest-earning workers, find themselves unexpectedly liable for income tax. This troubling situation has emerged through the mechanism of fiscal drag, where tax thresholds remain static while wages and pensions increase with inflation.
The fundamental problem stems from the income tax thresholds being frozen since 2021. The basic rate threshold remains at £12,570, the higher rate at £50,270, and the additional rate at £125,140. Originally implemented by the Conservatives in 2021, the freeze has been extended by current Chancellor Rachel Reeves in her November budget, with the policy now set to continue until 2031.
Pensioners Bear the Brunt of Policy Impact
Freedom of information data obtained from HMRC reveals a startling increase in simple assessment letters issued to individuals who owe tax on their income but no longer have PAYE codes deducting tax at source. The number of recipients has doubled in just two years, soaring from 675,000 in 2021-22 to 1.32 million in 2023-24.
This primarily affects pensioners, though savers with interest exceeding the £1,000 personal allowance may also be impacted. Industry experts point to the combination of frozen tax bands and the climbing state pension as the driving forces behind this dramatic escalation.
Simple assessment demands typically involve relatively modest sums:
- Nearly a quarter of demands issued in 2023-24 were for less than £100
- Half of all demands were for less than £300
State Pension Nears Tax Threshold Boundary
The situation is particularly acute for retirees, with growing numbers facing income tax for the first time since leaving employment. The full state pension will increase to £12,548 annually in April thanks to the triple lock mechanism, which ensures the benefit rises each year in line with the highest of inflation, wage growth, or 2.5 percent.
This payment will fall just £22 short of breaching the tax-free personal allowance, which remains frozen at £12,570 until at least 2031. Current projections indicate the state pension will exceed the personal allowance in April 2027, creating an increasingly problematic situation for millions of pensioners.
Government Response and Expert Warnings
Former pensions minister Steve Webb, now at consultancy LCP, issued a stark warning: "The continued freezing of the income tax personal allowance means that the numbers getting unwelcome end-of-year tax demands have soared." He emphasized that countless retirees relying solely on the state pension now face annual tax bills that increase year after year.
During last year's autumn budget, Chancellor Rachel Reeves pledged that from April 2027 onwards, pensioners whose only source of income is the full new state pension won't have to pay income tax. However, the practical implementation details remain unclear, and the commitment only extends to the current Parliament.
Financial expert Martin Lewis has raised serious concerns about the administrative burden facing elderly taxpayers. On his ITV show, he questioned: "How are we going to have 90-year-olds filling out self-assessment forms when they're only earning £50 over the limit?"
Lewis highlighted a crucial discrepancy in the government's approach, noting that individuals with small private pensions alongside state pension income might face taxation while those with only state pension would not, potentially creating perverse incentives.
Projected Increases and Future Implications
Projections based on minimum possible increases under the triple lock system paint a concerning picture:
- 2027: £12,861 (minimum new state pension)
- 2028: £13,183
- 2029: £13,512
- 2030: £13,850
LCP predicts the number of individuals receiving simple assessments will surpass two million once figures for 2024-25 emerge in the coming tax year. The Treasury maintains that this matter falls under government policy jurisdiction, while HMRC continues to implement the existing framework.
As the Saturday deadline approaches for many recipients of these tax letters, the broader implications of frozen thresholds continue to unfold, affecting pensioners, savers, and low-income workers across the United Kingdom.
