Many will be totally unprepared because they haven’t paid a penny in tax since retiring. That is changing as the freeze on income tax thresholds drags more and more pensioners into the tax system every year.
The number of pensioners liable for tax will have doubled from 4.5million to more than nine million since 2010.
Last week, the new state pension paid to those retiring after April 6, 2016, climbed by 8.5 percent to a maximum of £11,502 a year.
This is just £1,068 below the personal allowance of £12,570, which has been frozen for an incredible six years.
Ros Altmann, a former Pensions Minister turned campaigner, said that anyone who gets the full new state pension will be 92 percent of the way towards paying tax on other sources of income such as a private pension or part-time job.
The full old basic state pension pays just £8,814 a year, which is just 70 percent of the personal tax threshold, Altmann says.
But she said millions of basic state pensioners also get additional state pensions such as the State Earnings-Related Pension (Serps), State Second Pension (S2P), Protected Rights and Guaranteed Minimum Pensions.
This will tip more into a tax liability, she said. “However, many may have no idea they need to pay tax at all, especially if they have never been liable before.”
Altmann said this will cause huge “distress” to pensioners, and called on the HMRC and the Department for Work and Pensions (DWP) to notify pensioners of the risks. “More are now at risk of being hit with fines and penalties for not paying a tiny amount of tax they never knew was due.”
She added: “Most of those tipped into tax will be poorer pensioners with little more than their state pension to live on.”
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, while after six months it increases to five percent of the tax owed or £300, whichever is higher.
These penalties are repeated if the tax still hasn’t been paid after 12 months.
Most of those affected will be totally unaware of any liability and have probably never filled in a tax return in their life.
Altmann called on the government to raise the personal allowance in line with inflation again, so that many do not have to pay tax.
Failing that, she said that it has to “alleviate the distress being caused to many pensioners who are already receiving penalty notices”.
She said the DWP should warn everyone receiving state pension notification letters to check their tax position. “HMRC and the DWP should consider a national advertising and media campaign.”
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Altmann said that HMRC should also ensure that it has sufficient helpline capacity to cope with queries from worried pensioners. “Often the elderly have no digital access and cannot use online services easily. HMRC should also look into a dedicated helpline for older people.”
While many pensioners will receive a simple assessment showing how much they tax they are likely to owe, this needs to be checked as errors can be made.
Others will have to submit self-assessment tax return. “The majority of pensioners being newly dragged into the tax net will probably never had completed a tax return and have no idea how to do so.”
Altmann added: “It is even more important they HMRC recognises the need to support, rather than penalise them.”
She said the UK tax system is already far too complicated and needs reform, but too many confused pensioners risk being punished instead.
