Stealth taxes set to burden millions more in retirement

MILLIONS of pensioners who never expected to pay income tax in retirement are suddenly discovering that HMRC is on their case, and for many it comes as a rude awakening. And it’s only going to get worse.

In 2010, when the Tory-led coalition came to power, fewer than five million pensioners paid income tax, according to the Institute for Fiscal Studies.today, more than

8.5 million do so, and their numbers are set to grow from April, when another 650,000 will find themselves dragged into the income tax net.

For many, this will come as a shock. They may not even have the money to pay HMRC, with the money spent on everyday bills as the cost-of-living crisis drags on.this is just the latest money worry to plague pensioners.

FREEZE

Prime Minister Rishi Sunak and Chancellor Jeremy Hunt repeated that stealth tax rates are the culprit, notably their decision to freeze the personal allowance at £12,570 for six years, all the way through until 2028.

At the same time, the state pension triple lock has delivered bumper state pension rises, of 10.1 per cent last year and 8.5 per cent next month.

Those who retired after April 6, 2016, on the new state pension, will get £11,501 a year fromapril.that’s just £1,069 less than the personal allowance, which means pensioners only need to generate a small amount of income to pay tax on it.

Pensioners do not usually need to do a self-assessment tax return, as HMRC will automatically calculate what they owe. Many may not know they have a liability until too late. Those who ring HMRC for advice face a long wait as helplines are jammed.

STING

Andrew Tully, technical services director at Nucleus Financial, said while triple lock increases are welcome, they carry a sting in the tail for some.

“HMRC will not tax the state pension itself. Instead, it will ask your employer or pension provider to supply a suitable tax code, so you pay the right amount.”

If you are self-employed or have other earnings, such as rental income from a property, you may need to fill in a self-assessment tax return. “Remember to put some money aside to meet this future tax bill.”

This puts the onus on pensioners to keep an eye on how much tax they owe.this can be complex, especially if they have multiple sources of income. “If you have too much tax deducted, you can reclaim the difference from HMRC, but only if you know its wrong.”

Tully said if the state pension rises by a modest three per cent a year for three years, it could exceed the personal allowance by April 2027. This would push us all into unknown territory. It raises the spectre of the DWP paying the state pension, and HMRC claiming a chunk back in tax.

STRUGGLE

Pensioners will struggle with the new demand, said retirement specialist Just Group’s communications director, Stephen Lowe: “Many will be used to paying income tax from their working days but unless they were self-employed or had to fill in self-assessment forms, they may not have much experience in checking they are paying the right amount.”

People who have never been taxed before will struggle most. “The way the system works, people receiving state pension one year might receive a tax demand the next, when the money has already been spent.”

Lowe said the government has to make sure they understand what is happening. “Unfortunately, governments don’t have a good record of explaining things in terms people can understand, while HMRC has its own communications issues.”

ADJUST

Lowe said the state pension is not taxed itself, but private pension income adjusted to ensure the right amount is paid overall.

“Pension statements should show if your provider has the right figures and is applying the correct tax code to make the adjustments.”

Becky O’connor, director of public affairs at Pensionbee, said the first step is to add up all your sources of income, including state pension, private pensions, savings, and any part-time employment. “Use an online tax calculator to estimate potential tax liabilities, or seek professional advice.”

If your total income surpasses the £12,570 personal allowance, you may be liable to pay income tax and you will need to set aside funds to cover potential tax bills. “Create a budget and allocate a portion of income towards tax obligations to avoid a financial shock when bills arrive.”

Consider investing in Isas or pension schemes to minimise taxable income. Claim the marriage allowance and council tax discounts, if eligible, O’connor added.

‘HMRC will not tax the state pension itself. It will ask your pension provider for the right tax code instead’

HELP

The tax system is notoriously complicated so if stuck, ask for help, Lowe said. Citizens Advice and the government’s free Moneyhelper service can assist. “It can be hard to discuss finances. If necessary, you can give permission for someone to deal with HMRC on your behalf.”

If you fear a tax bill, do not stick your head in the sand.

HMRC will find you without doubt, so it is best to plan ahead.