HMRC 1.3m letters ‘need action by Saturday’ after tax threshold freeze

The frozen personal allowance and rising state pension has more into paying tax – leading to a huge rise in letters from HMRC

Frozen income tax thresholds have triggered over a million additional tax demands, shocking new figures reveal. The Conservatives kicked off the freeze back in 2021 – and it’s been dragged out further, with current Chancellor Rachel Reeves confirming in her November budget that it’ll stretch all the way to 2031.

Millions more people, including some of Britain’s lowest-earning workers, have been yanked into the tax net through ‘fiscal drag’. This trend has taken hold because the lowest income tax threshold has stayed stuck at £12,570 since 2021, even as wages have shot up due to soaring inflation.

These crucial thresholds dictate how much people can pocket before the taxman comes knocking, currently set at £12,570 for the basic 20 per cent rate, £50,270 for the higher 40 per cent bracket, and £125,140 for the top 45 per cent tier.

The Times reported that pensioners and savers getting hit with year-end tax bills has doubled in just two years. Industry insiders point to frozen tax bands and the climbing state pension as the culprits behind a massive spike in simple assessment letters from HM Revenue and Customs ( HMRC ).

1.32 million individuals received those dreaded brown envelopes informing them they owed tax during the 2023-24 financial year, rocketing up from 675,000 in 2021-22, according to freedom of information data obtained from HMRC. HMRC issues simple assessments to individuals who owe tax on their income but no longer have a PAYE code deducting tax at source.

This chiefly affects pensioners, but can also impact savers who owe tax on their interest if it exceeds the £1,000 personal allowance.

Simple assessment demands are frequently for relatively small sums. According to HMRC, nearly a quarter of those issued in 2023-24 were for less than £100, whilst half of all demands were for less than £300.

This revelation comes as growing numbers of retirees are being forced to pay income tax for the first time since finishing work, as frozen tax thresholds collide with the rising state pension.

The full state pension will increase to £12,548 annually in April thanks to the triple lock, which ensures the benefit rises each year in line with the highest of inflation, wage growth or 2.5 per cent.

As a result, the payment will fall just short of breaching the tax-free personal allowance, which remains frozen at £12,570 until at least 2031. The allowance has not risen since April 2021.

The state pension is projected to exceed the personal allowance in April 2027. Of the 13 million state pensioners, roughly 9 million receive the old version (pre-2016), which can be considerably more advantageous than the new version.

This is because of an additional earnings-related system from the 1970s, as well as generous increases for deferring the pension by a year or more. Pensioners could find themselves caught out by unexpected tax bills due to these extra payments.

Former pensions minister Steve Webb, now at consultancy LCP, warned: “The continued freezing of the income tax personal allowance means that the numbers getting unwelcome end-of-year tax demands have soared.”

Countless retirees relying solely on the state pension are now facing annual tax bills, with the sums climbing year after year.

He urged: “Although the government has indicated it may address this issue for a subset of pensioners from 2027, a much wider-ranging solution is needed.”

LCP predicts the figure for those hit with simple assessments will surpass two million once figures for 2024-25 emerge in the coming tax year.

During last year’s autumn budget, Chancellor Rachel Reeves pledged that from April 2027 onwards, pensioners whose only source of income is the full new state pension won’t have to pay income tax. However, the finer details of how this measure will work in practice remain under wraps.

HMRC confirmed the matter falls under Treasury jurisdiction, as it involves government policy decisions. HM Treasury has been contacted for comment.

Money guru Martin Lewis grilled the Chancellor following last November’s budget, raising serious concerns about pensioners who’ll find themselves marginally over the tax threshold. Mr Lewis highlighted a crucial discrepancy: the full new State Pension sits at £12,558 while the personal allowance remains frozen at £12,570 until 2031 – the amount Brits can earn without facing tax bills.

Mr Lewis has stated that the new state pension will be £30 below the allowance from April 2026. He further explained: “So anyone who’s got any other form of earnings – well you’re going to go over it if you’ve got the full new state pension you will have to pay tax.”

The financial expert delivered a stark warning about what’s coming down the line: “But from 2027 because we know the state pension has to rise by a minimum 2.5 per cent because of the triple lock here’s a projection. The minimum it could rise because of the triple lock 2027 it’s going to be about £12,861, £300 more than the tax free allowance as that’s staying stable and it will go more and more and more.”

Projections revealed on the Martin Lewis Money Show Live show the minimum new state pensions – based on the lowest possible increases – forecast to hit £12,861 in 2027, £13,183 in 2028, £13,512 in 2029 and £13,850 in 2030. He said: “So you can see the issue that’s going on. My main worry was the admin. How are we going to have 90-year-olds filling out self-assessment forms when they’re only earning £50 over the limit?” Mr Lewis harked back to his chat with Chancellor Rachel Reeves post-budget, where he posed a question from viewer Rebecca: “Does my 85-year-old father, who is living with dementia, now have to complete a tax return as his state pension will take him over the personal allowance?”

Ms Reeves clarified: “So if you just have a state pension and you don’t have any other pension you don’t have to fill in a tax return. I make that commitment for this Parliament. You’re right 2027 looks like the time it will cross over. We are working on a solution as we speak to ensure we’re not going after tiny amounts of money.”

Mr Lewis probed further: “People will have to pay the tax, they just won’t have to do a return or will they not have to pay the tax?” Ms Reeves responded: “In this Parliament they won’t have to pay the tax. Further out I’m not able to make any commitments.”

On his ITV show, he added: “What I find interesting is imagine someone who is a little bit off the full state pension. And they had a very small private pension but they still earned less than the full state pension. Under those rules they would have to pay tax and therefore they would be punished for having a private pension. Which is why I think the thing isn’t fully thought through yet.”

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