A leading consultancy firm has cautioned elderlies that they may need to start saving for unexpected tax bills. The combination of frozen income tax thresholds and an upcoming substantial State Pension hike from April could introduce more pensioners to tax payments.
The consulting firm, LCP (Lane Clark & Peacock) emphasised that the number of elderlies who could be taxed based on solely a State Pension is increasing. LCP noted the absence of an automated process for collecting the tax due as State Pensions are paid in gross, that is, before the tax deduction. In such instances, HM Revenue and Customs (HMRC) may implement a system called ‘simple assessment’.
‘Simple assessment’ entails that the Department for Work and Pensions (DWP) would inform HMRC of the total State Pension someone has received by the tax year’s end. If this amount pushes someone over the income tax threshold, a tax payment would be required.
LCP advised that HMRC might contact the retiree at the tax year’s conclusion, stating that they have not met the tax payable on their State Pension and requiring payment by January 31 of the following year.
The cautionary note was that elderlies could already have received- and spent – all of their pension within a tax year, only to get a tax bill on that same pension the succeeding year.
For those elderlies with a State Pension and a private pension, the state will gather any tax due via the code applied to the private pension.
The income tax threshold has been held at £12,570 since 2021/22. This could suggest that elderlies receiving more than £242 weekly may owe income tax.
LCP articulated that the latest online statistics from DWP indicates that as of November 2020, over 2.3 million elderlies had a state pension of at least £195 weekly. Considering State Pension hikes since then, these individuals would unsurprisingly have a pension surpassing the tax threshold in the upcoming year.
While a subset of these elderlies will have private pensions that can be used to offset any tax due, others may have significant State Pensions predominantly because they did not secure alternative private provisions, LCP inferred.
LCP estimated that about 20 per cent of these elderlies, equating to over 400,000 elderlies, may lack an alternative income source that HMRC can skim for taxes owed.
The group at risk of receiving unexpected tax bills and may need to consider setting aside a portion of their state pension monthly in preparation for a potential tax bill in the future, LCP stated.
Addressing this issue, Sir Steve Webb, a former pensions minister who is now a partner at LCP said: “Increasing numbers of elderlies have been drawn into the tax net recently, largely due to the sustained freeze on tax thresholds. Many are now at risk of receiving an unplanned tax letter from HMRC, claiming taxes they may not have known they owed.”
LCP hypothesised that many of those who could be affected by unanticipated bills could be recipients of the old State Pension, having reached their State Pension age by 2016. Those on the maximum Basic State Pension would see payments rise from the present £156.20 a week to £168.40 or £169.50 under an uprating of 7.8 per cent or 8.5 per cent respectively.
The full, New State Pension is currently £203.85 per week. A 7.8% uprating would result in people receiving £219.75 each week, rising to £221.20 under the 8.5 per cent figure.
Assuming the UK Government opts to increase State Pensions using the lower wages growth figure next April (7.8%), it would see millions of elderlies miss out on additional £75 in 2024. Nonetheless, experts have cautioned that any attempts to adjust or break the Triple Lock prior to a general election could be costly for the Conservative Party with a looming General Election in 2024.
Estimated State Pension payments obtainable from April 2024 include:
Current Annual Full New State Pension – £10,600
- Weekly: £203.85
- Every four-week pay period: £815.40
7.8% uprating April 2024 – £11,427 (up £827)
- Weekly: £219.75
- Every four-week pay period: £879.00
8.5% uprating April 2024 – £11,502 (up £902)
- Weekly: £221.20
- Every four-week pay period: £884.80
Meanwhile, PensionBee offers an inflation calculator that helps individuals understand the impact of inflation on their pension savings. You can access it here.
Formerly, Downing Street has declined to assure that benefits would rise with inflation or that pensions’ Triple Lock would be based on earnings, including bonuses (8.5%).
A spokesperson for the Treasury stated: “Our elderly population deserve security and dignity in retirement. This is why this year we offered the most significant cash increase to the state pension, a 10.1% rise, which was additionally supported by direct cash payments worth up to £1,350 each to assist with cost-of-living challenges and protection from energy bill increases.”
“Since 2010, we have exempted three million people from tax by elevating the Personal Allowance. The Chancellor has expressed motivation to lessen the tax burden, albeit maintaining sound money management must come first.”
