If you’re a pensioner and don’t think you earn enough to pay income tax, make doubly sure that’s still true. In 2010, when the Tories came to power, around 4.5 million retirees paid income tax. Today, nine million will.
Incredibly, an extra 650,000 will start paying tax this year, thanks to Rishi Sunak and Jeremy Hunt’s decision to freeze income tax thresholds until 2028.
The full new state pension pays £11,502 a year. Pensioners who get the maximum amount only need to earn another £1,068 to breach the frozen £12,570 personal allowance and pay income tax.
As the state pension rises each year in line with the triple lock, more and more will get pushed into paying tax.
A big concern is that many will not realise until too late. As I’ve explained before, HM Revenue & Customs does not tax the state pension itself.
Instead, it takes the money from other sources of income, by directly taxing pension withdrawals and annuity payments, or income from employment via PAYE.
Many pensioners have already contacted us to express their shock at receiving less income than they expected. That’s because the taxman is taking a bigger share.
However, not all tax is automatically deducted in this way. Pensioners with self-employed earnings above £1,000, rental property income or income from non-Isa savings and investments may need to declare it themselves by completing a self-assessment tax return.
Some may never have done this and have no idea what they need to do. That’s when the trouble really starts.
Anyone who misses the annual tax deadline on January 31 faces an automatic £100 late payment penalty, but that is only the start.
This escalates to £10 a day after three months. Then after six months it increases to five percent of the tax owed or £300, whichever is higher.
This is repeated if the tax still hasn’t been paid after 12 months.
Incredibly, these penalties apply even if you don’t owe tax in the first place.
Whatever you do, don’t stick your head in the sand, says Stephen Lowe, director at the retirement specialist Just Group. “HMRC has formidable powers to recover tax owed, levy penalties for unpaid tax, and charge late payment on interest.”
That’s only the start.
Lowe warned: “In extreme cases, HMRC can seize possessions, take money from bank accounts, make you bankrupt, or take court action for tax evasion that could result in imprisonment.”
That may sound extreme and of course most people never run into that kind of trouble, but he added: “HMRC is an organisation to be respected. Taxpayers can’t expect any special treatment just because they are pensioners.”
HMRC is hard but also fair, he said. “Where too much tax has been taken, refunds can be claimed, which makes it important to check the figures including any P60 forms issued by pension providers and employers.”
Taxpayers can also use appeals procedures which can take into account reasons such as ill health or bereavement as reasons for paying late. “Most important, if you find yourself in tax trouble, alert HMRC.”
You may also be able to get help from other sources. “Those on low incomes can get help from charities such as TaxAid and Tax Help for Older People.”
The good news is that pensioners whose income is mainly from state pension, private pensions and savings won’t have to submit a self-assessment form.
“Many will fall under the simple assessment system where HMRC sends a calculation for tax owed each year (PA302) which is also available to view online.”
You need to check the figures are correct, or appeal within 60 days, and pay the tax due by January 31 following the end of the tax year.
HMRC can charge interest on underpaid tax under simple assessment, but there are no fines for late payment or for failing to keep records.
Unfortunately, you can’t register for simple assessment. The decision is down to HMRC. It’s the one in charge here. It always is.
