For pensioners who are caught between frozen tax allowances and rising state pensions, the relief from pension insurance could be eliminated.
State pension recipients are in a delicate position because the triple lock guarantees them an annual increase in their pension income, which is moving ever closer to the frozen personal tax allowance of £12,570.
This could result in many people paying income tax on one benefit only in retirement, regardless of whether they have any other pension income or not.
However, HMRC has told The Telegraph that it is prepared to issue some tax bills to potentially hundreds of thousands of people in this predicament. The agency said it would not “go after hundreds of thousands of pensioners for small amounts” because it would be too costly to collect.
For most workers, income taxes are deducted directly from their paychecks through tax codes in the Pay-As-You-Earn system, making tax collection straightforward and inexpensive, regardless of the amount of tax owed.
However, state pension cannot be taxed at source and deducted automatically. In these cases, HMRC must send reminder letters to the taxpayer advising the amount due (also known as a simple tax assessment).
This year, around 140,000 pensioners have been affected by tax arrears, and forecasts suggest that around 400,000 pensioners could be affected next.
A HMRC spokesman told the press: “We do not normally issue simple tax notices that cost more to collect than is owed. That would not be a good use of public money.”
At present, there is no fixed rule as to the exact amount of this possible tax relief, as it is said to depend on individual circumstances and the costs associated with collecting the taxes.
If the state pension increases by 4.6 per cent in April next year (experts expect it to increase by 4.5 per cent), the total pension pot would rise to £12,572, exceeding the income tax threshold and potentially attracting a 40p tax levy.
The personal allowance is fixed at £12,570 until 2028 and is certain to be exceeded by the full value of the state pension due to the triple guarantee, which promises an increase every spring.
At least one million pensioners rely solely on state pensions and benefits, while a further 1.7 million will be able to collect the full new state pension, DWP data shows.
However, some industry voices are bracing for trouble. Nishi Patel of N-Accounting says any move by HMRC to ignore real tax is bound to cause controversy: “It would be outrageous if HMRC decided to write off amounts of tax actually owed, as many taxpayers would find this unfair.”
Guy Smith of Independent Tax commented: “In practice, HMRC could make a business decision and quietly decide not to collect small amounts of tax from pensioners. However, if other taxpayers found out about it, they would want the same flexibility.”
