Tax threshold freeze lands 1.3m with surprise demands from HMRC | Personal Finance | Finance
Frozen income tax thresholds are dragging growing numbers of pensioners and savers into the tax net – with more than 1.32 million people hit with unexpected end-of-year demands from HMRC.
New figures show the number receiving so-called simple assessment letters almost doubled in just two years, as the state pension rises while the £12,570 tax-free personal allowance remains frozen.
In the 2023-24 tax year, 1.32 million people were sent the dreaded brown envelopes telling them they owed income tax, up from 675,000 in 2021-22, according to data obtained from HMRC under freedom of information laws.
The surge has been blamed on a stealth tax effect caused by the tax threshold freeze, first introduced by the Conservatives when Rishi Sunak was Chancellor, colliding with rising retirement incomes.
The Tory freeze on tax thresholds was imposed in 2021-22 and then extended through to 2028. Rachel Reeves has extended it for a further three years.
Simple assessments are issued when tax cannot be collected automatically through PAYE. They mainly affect pensioners, but also savers whose interest breaches the £1,000 personal savings allowance.
While many bills are modest, the scale of the problem is growing fast. HMRC data shows nearly 25% of demands in 2023-24 were for less than £100, while 50% were for under £300.
However, campaigners warn that even small sums come as a shock to pensioners who believed they were safely below the tax line.
The full new state pension will rise to £12,548 a year in April under the triple lock, which guarantees annual increases in line with the highest of inflation, earnings growth or 2.5%.
That leaves it just £22 below the frozen personal allowance of £12,570, which has been stuck at the same level since April 2021 and is not due to rise until at least 2031. The state pension is forecast to exceed the allowance by April 2027, forcing millions into paying income tax for the first time.
Of the UK’s roughly 13 million state pensioners, around 9 million receive the older, pre-2016 pension. This can be significantly higher than the new system because it includes earnings-related top-ups from earlier schemes and bonuses for deferring retirement – often enough to trigger a tax bill.
Steve Webb, a former Lib-Dem MP and pensions minister who is now a partner at consultancy LCP, said: “The continued freezing of the income tax personal allowance means that the numbers getting unwelcome end-of-year tax demands have soared.
“Many of these people will be pensioners whose only income is the state pension, and they now get an annual tax demand, with the amounts growing each year.
“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 estimates the number of people receiving simple assessments will climb beyond 2 million once figures for 2024-25 are published.
At last autumn’s Budget, Chancellor Rachel Reeves said that from April 2027 pensioners whose only income is the state pension will be exempt from paying income tax, though the government has yet to set out how the policy will work in practice.
HMRC said the issue was a matter for ministers, as it flows from government decisions on tax thresholds.
