Former pensions minister Steve Webb has warned that hundreds of thousands of pensioners could face unexpected tax bills due to the combination of a scheduled 8.5% state pension increase next spring and the freeze on income tax thresholds. Webb, now a partner at LCP, said that growing numbers of older people will be dragged into the tax net purely on the basis of their state pension.
Although the state pension is paid gross, tax owed can usually be collected via PAYE codes for those with other income. However, for those receiving large state pensions but no other income or earnings, there is no automatic way to collect the tax, leaving them at risk of receiving a demand from HMRC after they have spent the money.
The full basic state pension is £156.20 a week, and the maximum new state pension is £203.85 a week, but many receive additional Serps top-ups. Official statistics show that over 2.3 million pensioners had a state pension of £195 a week or more in November 2020, and with subsequent rises, most will exceed the tax threshold of £12,570 next year.
LCP estimates that hundreds of thousands of these pensioners have no other income from which HMRC can collect tax, making them vulnerable to unexpected bills. Webb advised that they may need to set aside some of their state pension each month to pay future tax demands.
A Treasury spokesperson said that pensioners whose sole income is the basic or new state pension do not pay income tax, and highlighted the 10.1% increase this year and the raising of personal thresholds, which has taken 3 million people out of paying tax altogether.
