Taxpayers who will incur a tax liability on their state pension are being removed from self-assessment by HM Revenue and Customs, causing "confusion and worry".
According to RSM UK associate director Sara Bonavia, in recent weeks, she has seen a number of letters from HMRC to taxpayers infomring them they are being removed from self-assessment when there is no other mechanism to collect the tax.
In addition to causing confusion and worry for individuals, Bonavia also warned this could “stack up issues for the future”.
Real world examples
To illustrate the issue, Bonavia gave them example of someone she called “individual A” who defers their state pension and so benefits from a slightly increased pension of around £20,000 and has savings income of £1,500.
Their income is over the personal allowance and savings allowance, and therefore generates a tax liability but, as there is no PAYE income, HMRC would not have the ability to collect tax at source.
The individual has been submitting tax returns and making payments on account each January and July for many years.
However, they have now received a letter saying they no longer need to complete returns, with no indication as to how to pay their tax liability once their balancing payment for 2022/23 has been paid.
Additionally, Bonavia also mentioned "individual B" who receives a UK state pension and an overseas private pension - and again incurs a tax liability that has been collected via self-assessment for many years.
They have also been removed from self-assessment with no indication of how to pay the tax.
Running the HMRC checker as to whether the individual needs a return comes back with “you need to send in an SA return”, which is not surprising given the resulting liability.
Bonavia reported that both these individuals have approached RSM for advice as to what to do.
One of them tried calling HMRC but gave up after 45 minutes, and both were worried that if they do not continue to pay their tax they will be storing up problems for the future.
This therefore led Bonavia to consider other options.
Other options
She suggested that individual A’s income could be fully taxed at source if the state pension was taxed under PAYE and, depending on the numbers, this could also be possible for individual B.
She also commented that increasing the state pension annually when interest rates are rising and divided allowances are falling, without increasing the personal allowance, will cause more pensioners to have a tax liability and no clear mechanism to settle this effectively.
“The easy option would be to increase the personal allowance at the same rate as state pensions, but the government has already committed to freezing this until April 5 2028, when it will start being indexed by the consumer price index,” she said.
“State pensions are expected to rise by 8.5 per cent in April 2024, taking the new state pension to £11,501 for 2024/25, leaving just £1,069 of personal allowance remaining.
“A similar rate of increase in the following years would make the new state pension greater than the personal allowance well before April 5 2028.”
Therefore, Bonavia is calling on HMRC and the government to keep simplicity for pensioners’ tax affairs and avoid them from building up unexpected tax liabilities.
In response, an HMRC spokesperson said: “Some customers receiving state pension who were previously required to complete a self assessment tax return may now be issued a simple assessment instead.
“This is much more straightforward for the customer as they don’t need to complete any forms, they just need to check they’re paying the right tax.”
tom.dunstan@ft.com
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