400,000 pensioners at risk of being hit with shock tax bills a year after they receive their pension, former minister warns

• More than half a million will be dragged over their personal allowance threshold
• Someone getting £242 a week will pay tax but it won’t be deducted from pension

Hundreds of thousands of pensioners could be hit with shock tax bills a year after they receive their state pension.

From next April, an estimated 400,000 older people will be at risk of receiving unexpected tax demands and will have to start setting aside some of their state pension each month, a former pensions minister has warned.

More than half a million retirees will be dragged over their personal allowance threshold – the point at which you must start paying tax – next year when the state pension rises.

But a catch in the way tax is levied means many could be caught out by delayed tax bills, former pensions minister Sir Steve Webb has warned.

Many of those with legacy state pensions will find themselves taxed on it for the first time (stock image)

Sir Steve Webb (pictured), who is now a partner at consultancy LCP, warned that pensioners could inadvertently spend all their taxable income before receiving a demand from HMRC

Any pensioner receiving more than £242 a week will have to pay tax, but it may not necessarily be automatically deducted from their pension.

Many will receive their tax bill the year after they have received their pension, and so will be responsible for setting aside money each time they receive their state pension.

Sir Steve, who is now a partner at consultancy LCP, warned that pensioners could inadvertently spend all their taxable income before receiving a demand from HMRC.

He said: ‘Many are now at risk of an unexpected letter from HMRC asking for tax they may not have realised was due.’

The Government typically collects tax through the tax code applied to a private pension as it is classed at PAYE income.

However, for those who do not have a personal pension and only rely on the state pension, the tax cannot be automatically collected.

In these cases, HM Revenue & Customs will use a system known as ‘simple assessment’, where bills are issued after the end of the tax year.

Sir Steve estimates that more than 400,000 pensioners may have no other source of income from which HMRC can collect the tax owed.

The state pension could increase by 8.5 per cent next April under the Government’s ‘triple lock’ pledge, after earnings growth leapt higher than expected over the summer, according to official data released on Tuesday.

Any pensioner receiving more than £242 a week will have to pay tax, but it may not necessarily be automatically deducted from their pension (stock image)

Sir Steve estimates that more than 400,000 pensioners may have no other source of income from which HMRC can collect the tax owed (stock image)

The triple lock guarantees that pensioner incomes rise by the highest of inflation, wage growth or 2.5 per cent every year.

However, officials have warned that the Government is looking at plans to reduce the increase in the state pension so recipients do not get the full 8.5 per cent they are expecting.

They argue the figures are artificially high and ‘distorted’ by one-off public sector bonuses and wage settlements.

Unless the triple lock is tweaked, pensioners on the full new state pension – paid to those who reached pension age after 2016 – are in for a £902.20 boost next year, pushing their annual income up to £11,502.40.

However, this pushes them closer to the upper limit of their personal income tax allowance, which has been frozen at £12,570 until 2028 in a ‘stealth tax’ raid.

This means they can take a separate income – for example, from a private pension – of just £1,067.60 a year before income tax kicks in.

Many of those with legacy state pensions will find themselves taxed on it for the first time.

This means that pensioners will not see the full increase and will have to hand some of it over to the taxman, if their private or workplace pension exceeds the allowance.

Source: Read Full Article