TAXING TIMES
Warning for 140,000 in retirement as first ever tax demands hitting doormats NOW – check if you’re affected
Plus we reveal what you can do to reduce your tax bill AND earn easy cash
TENS of thousands of pensioners are set to get tax demands for the first time since they retired.
This is due to a combination of hefty state pension rises and frozen tax thresholds.
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Over the next six weeks, HMRC is writing to 560,000 customers as part of its "simple assessment" process which assesses who needs to pay what tax.
Of this number, around 140,000 pensioners will receive a letter for the first time due to being dragged into paying tax.
The personal allowance threshold, which is the rate at which people start paying tax, has been frozen at £12,570 since April 2021.
The government freezes tax thresholds as a way to raise extra cash without directly increasing taxes.
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As wages or income from pensions rises each year, more people are dragged into paying tax, or into higher tax brackets.
Pensioners will pay tax if they've got additional income on top of the state pension.
Former pensions minister and consultant at LCP Steve Webb explained that because HMRC already holds all the information on someone’s taxable income from wages, state pensions or private pensions, and collects that tax through the PAYE system, it can work out their tax liability without them needing to fill out a full self-assessment tax return.
But, where insufficient tax has been collected – for example, from pensioners who only receive a state pension – they then write out at the end of the tax year with a tax demand, in this case for 2023/24.
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With tax thresholds frozen again for 2023/24 and state pensions rising by over 10% last April, many pensioners have now been dragged into the tax net, some for the first time.
Steve said: "It is rarely good news to receive a letter from HMRC and in this case, 140,000 pensioners will be getting a tax demand in the next few weeks for the first time since they retired.
What are the different types of pensions?
"The size of the bill will often be relatively small at first, but this could grow year-on-year if the current policy of freezing tax thresholds continues.
"The recipients of these letters are not well off, and some will have a living standard below the pensions industry’s assessment of the ‘minimum’ income needed for a basic quality of life."
He also warned that there is a risk that scammers will catch on to the fact that these letters are being sent out and come up with fake letters trying to get money out of pensioners.
"The new Government needs to take an urgent look at whether taxing so many people on such modest levels of income in retirement is really the right way to proceed," Steve added.
HMRC has said that the letters going out will include a detailed calculation of any tax due for income they received between April 2023 and April 2024.
They’ll need to pay what they owe using Simple Assessment.
If you do get one of the letters don't stress too much because you have until January 2025 to pay the bill.
Plus, if you want, you can even pay in instalments if you want - as long as it's fully paid by the deadline.
There is an online guide with more information for pensioners who receive a demand.
How does the state pension work?
AT the moment the current state pension is paid to both men and women from age 66 - but it's due to rise to 67 by 2028 and 68 by 2046.
The state pension is a recurring payment from the government most Brits start getting when they reach State Pension age.
But not everyone gets the same amount, and you are awarded depending on your National Insurance record.
For most pensioners, it forms only part of their retirement income, as they could have other pots from a workplace pension, earning and savings.
The new state pension is based on people's National Insurance records.
Workers must have 35 qualifying years of National Insurance to get the maximum amount of the new state pension.
You earn National Insurance qualifying years through work, or by getting credits, for instance when you are looking after children and claiming child benefit.
If you have gaps, you can top up your record by paying in voluntary National Insurance contributions.
To get the old, full basic state pension, you will need 30 years of contributions or credits.
You will need at least 10 years on your NI record to get any state pension.
Why is this happening and is there anything I can do to avoid it?
High inflation rates mean more people in work are getting pay rises to try and keep pace with rising prices.
However, with income tax bands frozen, it means many are being pushed into the next tax bracket.
Laura Suter, director of personal finance at AJ Bell, previously told The Sun: "Pensioners looking to reduce their tax bill need to think about how they can maximise their tax-free income.
"For example, any withdrawals made from their ISAs will be free of any tax. so they can use that pot of money to boost their income without impacting their tax bill."
An ISA is a type of savings account in which you can save up to £20,00 a year tax-free.
Laura also suggested that couples can organise their finances so they ensure they are each making use of their tax-free allowances, which might involve moving money or assets between themselves.
We also spoke to Helen Morrisey, head of retirement analysis at Hargreaves Lansdown, who added that pensioners might want to use some of their pension to top up their income.
She said: "Most people can access 25% of their pension as a tax-free lump sum so they may decide to use this to top up their income without pushing up their tax bill."
However, she also warned that pensioners below the personal allowance are going to find it increasingly difficult to avoid paying income tax in the coming years.
The finance expert added: "A full new state pension hits just over £11,500 per year and even relatively modest 3.5% annual increases would see people pushed over the threshold by the time the threshold freeze ends."
When does the tax year start and end?
Tax years run differently to the standard January to December year
Instead, it runs mid-year from April to April.
Many other countries around the world have tax years that run with the calendar year.
In Ireland, the US, France and Germany for example, it starts on January 1 and ends on December 31.
But in the UK for historical reasons, our tax year starts and finishes mid-way through.
The 2023-2024 tax year starts on April 6, 2023, and ends on April 5, 2024.
The 2024-2025 tax year runs from April 6, 2024, to April 5, 2025.
Other ways you can save on tax
Tax-free childcare
Families can claim up to £2,000 a year tax-free to go towards childcare costs, as well as 30 hours of free childcare if they are eligible for both.
To be eligible, both parents must work at least 16 hours a week and earn the minimum wage or above.
Visit gov.uk/tax-free-childcare to get started.
Savings allowance
Low earners taking home between £12,570 and £17,570 a year could earn up to £5,000 in interest on their savings without having to pay a penny in tax.
This situation is most likely to apply to pensioners who have a lot of cash in savings but are no longer earning a wage or are reliant on the state pension.
If you earn more than this, you can still make £1,000 in interest tax-free.
Marriage allowance
Couples on a low income who have tied the knot could save £252 a year with the marriage allowance.
The allowance allows one partner to share 10% of their £12,570 tax-free personal allowance with the other to reduce their tax bill, assuming they have it spare.
Claims can be backdated for up to four years, saving a taxpayer £1,260 in total.
You can claim it on the Government website.
Trading allowance
Savvy sellers could earn up to £1,000 a year by flogging their wares or services with the trading allowance.
The allowance could save basic-rate taxpayers up to £200 a year in tax.
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Rent out your home or driveway
Anyone with a driveway to spare or going away for a few weeks could earn up to £1,000 tax-free.
You can rent your home on Airbnb while you are on holiday or let out your driveway to commuters for a bit of extra cash, and as long as you earn below the £1,000 threshold, you don't need to pay a penny in tax.
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