HMRC’s new policy on pensioners and small tax bills
Pensioners across the UK have received some reassuring news: HMRC, the government body responsible for collecting taxes, will be writing off small tax bills for pensioners.
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This decision is based on the fact that it would cost HMRC more to collect these small amounts than they are worth.
But what exactly does this mean for you, especially if you’re relying on your state pension?
Frozen tax thresholds: the hidden impact
The government has frozen income tax thresholds until 2028, meaning the amount of income you can earn before paying tax won’t increase, even as living costs rise. This freeze may come as a surprise to pensioners. The triple lock policy and rising pensions – a double edged sword
The Triple Lock Policy, which ensures the state pension is increased each year by either the inflation rate, the average earnings growth or 2.5% has been hailed as a good thing for pensioners. It comes with a small catch. The state pension will rise by 4.5% in the next year, and then by another 4.6% in the following year. By April 2026, the annual pension may reach PS12572.
Since personal allowances are frozen at PS12,570 until 2028, a small increase in the pension could lead to a tax bill as low as 40p. HMRC confirmed they will not pursue pensioners who owe very small amounts of taxes.
If your state pension increase means you owe just a little bit of tax, HMRC isn’t going to make you go through the hassle of filing a tax return or dealing with complex paperwork.
Most pensioners who pay tax via PAYE will see any tax owed adjusted in their tax code automatically. HMRC will send a Simple Assessment Letter to those who do not pay tax via PAYE.
However, if the amount is too small to justify the administrative cost of collection, HMRC will simply write it off.
Calls for clarity and fairness
While this approach provides some relief, experts and charities are urging HMRC to be clearer about what they mean by “small amounts” of tax.
They’re also calling for a review of the personal allowance threshold, suggesting it should be raised to prevent more pensioners from being pulled into the tax net unnecessarily.
Sir Steve Webb, a former Liberal Democrat MP, has pointed out that some of these tax demands could be for just a few pounds or even pence, questioning whether it’s a good use of public money to collect such small amounts from so many pensioners.
What this means for you
If you’re a pensioner, it’s important to keep an eye on your income and any communication from HMRC. If you are unsure how the changes will affect you, you can speak to a tax adviser or contact HMRC for advice.
Remember, there are organisations ready to help you navigate these matters, ensuring that your finances are managed with as little stress as possible.
This decision by HMRC is a positive step for pensioners, but the ongoing discussions around tax thresholds and fairness are important to follow, as they could significantly impact your financial situation in the coming years.
Ricky Willis is the original Skint Dad. Money-making enthusiast and father to Naomi. He’s always on the lookout for new ways to make a little more money.
