Thousands of retirees across the UK have been hit with unexpected tax bills after claiming the State Pension for the first time, according to shocking new figures.
Data obtained through a Freedom of Information request shows that in the 2022/23 tax year, a staggering 8,510 people received tax demands from HMRC shortly after beginning to receive their State Pension payments.
Why Are New Pensioners Facing Tax Bills?
The issue arises because the State Pension is treated as taxable income, but unlike salaries, tax isn't automatically deducted at source. Many new pensioners don't realise they may need to pay tax if their total income exceeds their Personal Allowance.
Steve Webb, former Pensions Minister and now partner at LCP, explains: "The State Pension is taxable, but no tax is taken off before you get it. If your total income including pension exceeds your tax-free allowance, you'll owe tax which HMRC will try to collect."
How HMRC Collects the Tax
Typically, HMRC will adjust your tax code to collect the tax due on your State Pension through other sources of income, such as:
- Private pensions
- Part-time work
- Investment income
However, if these sources don't provide enough taxable income, you may receive a direct tax bill from HMRC.
How to Avoid Surprise Tax Demands
Financial experts recommend taking these steps to prevent unexpected tax bills:
- Check your tax code as soon as you start receiving the State Pension
- Calculate whether your total income exceeds your Personal Allowance
- Contact HMRC if you think your tax code is wrong
- Consider setting aside money to cover potential tax bills
Webb warns: "Many people assume the State Pension is tax-free, but this simply isn't the case. Being hit with an unexpected tax bill can be particularly painful for those on tight budgets."
The situation highlights the importance of understanding the tax implications of retirement income. With the State Pension increasing to £11,502 per year from April 2024, more retirees may find themselves unexpectedly crossing the tax threshold.
