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Unexpected tax demands on State Pensions
We all know that even though it is taxable, the State Pension is always paid gross and cannot have tax deducted from it. Lane Clark & Peacock LLP (LCP) has issued a Press Release where Sir Steve Webb, the former Pensions Minister sets out the findings of analysis he has undertaken into pensioners and income tax.
This shows that hundreds of thousands of these pensioners have no PAYE income which can be used to collect the tax which they owe. As a result, these pensioners are set to get tax demands following the end of the tax-year in which they received their pension and will need to set money aside now for when that tax demand arrives. This is less of an issue for pensioners who have a regular pension income from either a defined benefit (DB) or defined contribution (DC) scheme and the PAYE code against this source of income can be adjusted to deduct income tax due in respect of their State Pension.
With the personal allowance to “flatline” at £12,570 from April 2024, anyone with a State Pension of £242 per week will have exceeded their personal allowance. Now, you might think, “so what”? The new State Pension is set to rise to around £221 per week in April. However, according to statistics from the DWP, as at November 2020, there were approximately 2.3m individuals in receipt of a State Pension of £195 per week. Taking account of increases since then for an individual who attained their State Pension Age (SPA) on or after 6 April 2016, from April 2024 their State Pension could be £244.42 per week or £12,710 p.a. An individual who attained their SPA prior to 6 April 2016, their State Pension from April 2024 would be £243.42 per week or £12,657 p.a. Therefore, there could be a significant number of pensioners in the UK whose State Pension will exceed their personal allowance and some of those will not have any income assessed under PAYE to deduct the income tax due on their State Pension.
Even those in receipt of a weekly State Pension equal to the “standard” New State Pension of £203.85 per week will find with only increases of 2.5% p.a. their pension will be greater than their personal allowance from April 2027. Matters are made slightly worse as that is a 53-week tax-year!
According to Sara Bonavia, associate director at the accountancy firm RSM, HMRC is writing to taxpayers who will incur a tax liability on their State Pensions removing them from self-assessment, but are providing no indication of how the tax will be collected. RSM have given two examples of individuals who have approached them for help after receiving letters from HMRC informing them they were being removed from self-assessment:
- They had deferred their State Pension for a number of years, so benefit from a significantly increased pension of around £20,000 p.a. They also have savings income of £1,500. Their income is clearly over the personal allowance and Personal Savings Allowance, and therefore generates a tax liability. There is no PAYE income, so no ability for HMRC to collect tax at source. The individual has been submitting tax returns and making payments on account each January and July for many years. However, they have now received a letter saying they no longer need to complete returns, with no indication as to how to pay their tax liability once their balancing payment for 2022/23 has been paid.
- He receives a UK State Pension and an overseas private pension and, again, incurs a tax liability that has been collected via self-assessment for many years. They have also been removed from self-assessment with no indication of how to pay the tax.
One of them tried calling HMRC but gave up after 45 minutes! Both were worried that if they don’t continue to pay their tax they are storing up problems for the future.
Running the HMRC checker as to whether the individual needs a return comes back with ‘you need to send in a self-assessment return’, which is not surprising given the resulting liability.
As already demonstrated above, this problem is only going to get worse, bringing more pensioners into tax. This had lead RSM to consider other options. This has drawn them to conclude that having the State Pension taxed under PAYE would make life easier for everyone!
This information is correct as at 21/11/23.
The Financial Conduct Authority (FCA) does not regulate tax advice.