Pensioners caught between frozen tax allowances and rising state pensions could have their liabilities forgiven Pensioners on a state pension are in a difficult position because the triple lock guarantees annual increases to their pension income that are getting ever closer to the frozen personal tax allowance of £12,570.
This could result in many people having to pay income tax on just one pension, regardless of whether they have other pension income or not. However, HMRC has told The Telegraph it is prepared to forgive some tax debts for potentially hundreds of thousands of people in this situation.
The ministry said it would not “pursue hundreds of thousands of pensioners for small amounts” because it would be too expensive to collect. For most working people, income tax is deducted directly from their wages via tax codes in the pay-as-you-earn system.
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This makes tax collection easy and inexpensive, regardless of the amount owed. However, the state pension cannot be taxed at source and collected automatically.
In these cases, HMRC must send reminder letters informing the taxpayer of the amount due, also known as a simple tax assessment letter. Around 140,000 pensioners have been hit by tax demands this year and estimates suggest that around 400,000 could be affected next, according to forecasts, the Express reports.
A spokesman for the British tax authority HMRC clarified: “We do not normally issue simple tax assessments that cost more to collect than is owed. That would not be a sensible use of public money.”
There is currently no clear threshold for how much tax can be forgiven, as the decision reportedly depends on the specific situation and the collection costs involved.
If state pensions rise by 4.6% next April – experts estimate around 4.5% – the total could rise to £12,572. This would exceed the income tax allowance and potentially result in a tax bill of 40p.
With the personal allowance fixed at £12,570 until 2028, it is likely to soon be overtaken by the full state pension due to the ‘triple lock’ which guarantees annual increases.
More than a million pensioners rely solely on their state pension and benefits, and additional data from the DWP shows that around 1.7 million are on the new full state pension.
Nevertheless, some experts predict discontent. Nishi Patel of N-Accounting warns of possible backlash if HMRC decides to ignore tax due. He comments: “It would be outrageous if HMRC decided to write off amounts of tax actually owed, as many taxpayers would find this unfair.”
Guy Smith, representing Independent Tax, said: “In practice, HMRC could make a commercial decision and quietly decide not to collect small amounts of tax from pensioners. However, if other taxpayers were to find out about this, they would want the same flexibility.”
