The freeze on income tax thresholds has triggered a deluge of more than a million extra tax demands from HM Revenue and Customs, with pensioners and savers bearing the brunt of the policy.
The Rising Tide of Tax Demands
New figures reveal that over 1.32 million people received 'simple assessment' letters from HMRC in the 2023-24 financial year, informing them of outstanding tax dues. This marks a dramatic near-doubling from the 675,000 letters sent just two years earlier in 2021-22.
This surge is a direct consequence of the income tax personal allowance being frozen at £12,570 since 2021. The policy, initiated by the Conservatives and extended by Chancellor Rachel Reeves in her November budget until at least 2031, means tax bands are not rising with inflation or wages. As earnings increase, millions are pulled into paying tax or into higher tax brackets – a phenomenon known as 'fiscal drag'.
Pensioners and Savers in the Crosshairs
HMRC issues simple assessment letters to individuals who owe tax but do not have a Pay As You Earn (PAYE) code to collect it automatically. This predominantly affects retirees whose state pension is now pushing them over the tax-free threshold, as well as savers who owe tax on interest exceeding their £1,000 savings allowance.
While the sums demanded are often modest – with nearly half for less than £300 and a quarter for under £100 – the administrative burden and unwelcome surprise are significant. The situation is set to intensify as the state pension, boosted by the triple lock, rapidly closes in on the frozen personal allowance.
The full new state pension will rise to £12,548 in April 2026, sitting just £22 below the £12,570 allowance. Forecasts suggest it will definitively surpass the threshold in April 2027, potentially dragging hundreds of thousands more pensioners into the tax system for the first time.
Political Promises and Practical Problems
Following the autumn budget, Chancellor Rachel Reeves addressed concerns raised by money expert Martin Lewis. She committed that, for the current Parliament, pensioners whose only income is the full new state pension will not have to complete a tax return or pay tax even if they technically exceed the allowance.
However, this pledge only applies from April 2027 and solely to those with no other income. Martin Lewis highlighted a potential unfairness, stating, "Imagine someone... with 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."
Former Pensions Minister Steve Webb, now a partner at LCP, warned that the number of people receiving these assessments is likely to exceed two million when figures for 2024-25 are released. He called for a "much wider-ranging solution" beyond the government's limited 2027 proposal.
The Treasury, which sets the policy, was contacted for comment regarding the long-term plan for addressing the intersection of frozen thresholds and rising pensions. HMRC confirmed the matter is one for the Treasury to resolve.
