Tax bill for pensioners

I'm a retired accountant and can't agree that anything about tax is simple to many non-accountants or well-informed numerate folks. Some people find handling numbers doesn't come naturally to them, just as I can't paint, draw, write poetry or sew anything more complicated than a button!

The easiest thing to do is add up all the sources of income in a tax year (ending 5th April annually), using the Gross (before tax is taken off) figures, ignoring interest from ISAs (or other non-taxable income such as interest from some National Savings investments) and the first £1,000 interest from other savings, and deduct £12,570 for the annual tax-free personal allowance. The remaining figure will be taxed at 20%. If this figure is more than the tax already paid on the various sources of income then the balance is payable. Yes, apply to pay in instalments if it is difficult to pay all at once.

Your mum should have had communication from all her sources of income for the relevant tax year which will show the gross amount earned and the tax deducted "at source" - and as others have said no tax is deducted nowadays from interest received. A mistake I believe especially now that interest is not as insignificant as it used to be.

Good luck with it all.

Not sure I agree that self assessment is a simple process Silverbrooks, I do it every year, and still find it an absolute pain, I loathe it. It must be daunting for those who are receiving notice that they need to complete it in future, and tax bills for the first time, even though the same thing happened last year for thousands, so it’s not a surprise when it comes in the post.

The flip side of that was that there were a lot of people who had tax deducted from savings who were not liable to tax and then had to reclaim it. That involved HMRC in a lot of work getting tax returns from people on low incomes.

Setting up a personal tax account is very simple. You will be allocated a 12 digit Gateway ID and invited to set up a password. Then you can see at a glance all your tax assessments, income and tax codes. If your income changes in year you can notify HMRC online.

I self-assess each year. It's a simple process. HMRC agree the liability online but also send a Self Assessment Statement showing the amount to pay and ways to pay. These are: online banking, phone banking, CHAPS, BACS, card payment, bank in branch or cheque through the post to HMRC. The giro slip is attached to the statement.

Just after posting this morning two brown envelopes arrived. One said I owed over £800 due to savings and said this was to be coded out.or I could pay it through a personal tax account. I don’t have such an account as I am 84 years and want to avoid any complications I don’t need to have. Also the other letter was from the tax office giving me a new higher K code. As this starts in a few days I didn’t want to chance paying it and still being taxed at a higher rate.Oh! for the good old days when we were taxed at source and knew where we were.

It’s £1000 Maggs.

It could be from her Savings Accounts the interest is not taxed at source but is reported to the HRMC. If she has received over the permitted amount of interest. I'm not 100 percent sure what the amount is but I think it's £500. Only ISA's are tax free interest.

This often happens when someone first receives State Pension. In the ordinary scheme of things, DWP tell HMRC what SP has been awarded (and do so each year) but there is often a time lag and the tax code isn’t adjusted to take the pension into account in the first year. When that happens, people need to be putting aside 20% or 40% of the SP to cover the eventual tax bill.

State Pension is also taxed on the “arising basis” as opposed to the “receipts basis” so you will be assessed on what is due to be paid for the tax year not what is actually paid in the tax year. These amounts can differ as SP in paid in arrear.

For example, the SP rises each year from the first Monday on or after 6 April. Depending on your payment date you may receive a payment in April at the old rate and not receive the payment at the new rate until May. Nevertheless, your tax for the year will be assessed at 13 four-weekly payments at the new rate. For most people this won’t make a difference year-on-year but it could for people who are just on the cusp of paying tax or those whose marginal rate is close to 40%.

I reached SP age in summer on 2021. Although I claimed the pension four months before my 66th birthday, when I was invited to do so, it took until almost the end of the calendar year until it was paid. It was backdated of course but my tax code for 2021/22 was not adjusted. The delay was due to the pandemic backlog and other complications. I imagine there were similar delays at HMRC. I owed £3,000 tax but had put the money aside to pay it.

What a coincidence! On Saturday I received three letters fromHMRC - two were informing me of my tax codes for last year and the coming year, and one was a demand for over £1400 of tax that I owed. I felt like a criminal - I've never owed that much tax, although it was probably to do with finally getting my SP in July last year and also the interest on my savings which have accrued more interest than anticipated due to the rise in interest rates over the last couple of years.

I paid it through online banking this morning. I'm sorry to say that I'm one of those people who do what they're told by the tax office - I know several people who have argued the toss and ended up paying more than the original amount demanded, although their income sources are much more complicated than mine! I just feel so fortunate that I have enough income through work pension, state pension and savings to be in the position to be able to pay and contribute via tax. I was the same when I was working full time from 16 until I was 62 - the only figure I took real notice of was my take-home pay. If it was enough to live on, that was a positive result.

I really feel for those who are struggling in these difficult times.

Doodledog

Thanks everyone. I have suggested that my mother rings them to ask for clarification.

This would be your best move. I doubt anyone on here can give you the right answer.

Thanks, Silverbrooks. I think you're right and it will be tax on savings. Mum's affairs are not complicated, so she should be able to sort it out over the phone, but I'll bear your offer in mind if she needs anything explaining.

does your mother have a pension besides the state pension - even just a few pounds?
if so then there is the option of having any payment due on a weekly/monthly basis
the reason for the amount is probably due to the rise in interest on savings accounts . I was not that long ago when interest rates were about 1% now over 4%. Compound interest on savings means the bill will rise

Yes. They are always busy but there will be people keen to get the correct tax code before first pay day after 6 April 2025.

Feel free to DM if I can help in any way. It was my profession for 50 years, both sides of the fence.

I'm sure it will be one of the two things explained upthread, or a combination of the two, and possibly relates to two or more years. Whatever it is, it sounds like HMRC can't recoup through a tax code adjustment, as explained.

I have advised her to phone them, as they will be able to explain without speculation. She has until June to pay, so I suggested she wait until after 5th April, as they will be busy just now.

Allira

There's nothing like evidence in writing, Casdon.

I remember years ago going through some old paperwork and finding old payslips, realising I was owed tax from when I left work when pregnant.
I had under a week to the deadline to claim, a young man at the tax office in Exeter was very helpful and expedited it. The cheque wasn't for much but very useful as we'd just moved house.

Sometimes decluttering isn't such a good idea.

I agree, I still have my bank statements sent, for the same reason too, I do online banking, but I find it easier to check things are right on paper - I must have a short attention span I think.

Doodledog Perhaps your mum has records? We've records of everything, I sort through and give our accountant what she'll need.

Maybe your mum might deliver records to her accountant?

There's nothing like evidence in writing, Casdon.

I remember years ago going through some old paperwork and finding old payslips, realising I was owed tax from when I left work when pregnant.
I had under a week to the deadline to claim, a young man at the tax office in Exeter was very helpful and expedited it. The cheque wasn't for much but very useful as we'd just moved house.

Sometimes decluttering isn't such a good idea.

Allira

Silverbrooks

That was years ago. It doesn’t work like that now. Tax codes are not automatically sent out. Much is paperless via Gateway. Where paperless, changes in tax code are notified by email.

It is highly unlikely that HMRC would allow arrears of £800 to be paid off at £5 per month. The normal length of a payment plan is twelve months or possibly 2 to 3 years. £5 pm wouldn’t even come close.

If the arrears cannot be collected through an adjustment to the tax code which, if the State Pension is already in excess of £12,570, would require an even bigger negative K code, HMRC will demand a direct payment.

If time to pay is requested:

HMRC will ask for

• Monthly income from all sources.
• Assets including savings accounts and physical assets that could be sold to raise money to pay the outstanding tax.
• Monthly regular outgoings on living expenses.

HMRC will expect someone to use funds from savings or investments to reduce the tax that is owed.

Any payment plan will also include interest that accrues on late payment.

From 6 April 2025, late payment interest is set at base rate (which is currently 4.5%) plus 4% so that will be 8.5%. It is currently base rate plus plus 2.5% so 7%. Those rates are set high to encourage people to pay promptly.

That was years ago. It doesn’t work like that now. Tax codes are not automatically sent out. Much is paperless via Gateway. Where paperless, changes in tax code are notified by email.

I still receive one.

It only applies if you positively opt to be paperless. I haven’t, I prefer to have written evidence in case I need it later.

Silverbrooks

That was years ago. It doesn’t work like that now. Tax codes are not automatically sent out. Much is paperless via Gateway. Where paperless, changes in tax code are notified by email.

It is highly unlikely that HMRC would allow arrears of £800 to be paid off at £5 per month. The normal length of a payment plan is twelve months or possibly 2 to 3 years. £5 pm wouldn’t even come close.

If the arrears cannot be collected through an adjustment to the tax code which, if the State Pension is already in excess of £12,570, would require an even bigger negative K code, HMRC will demand a direct payment.

If time to pay is requested:

HMRC will ask for

• Monthly income from all sources.
• Assets including savings accounts and physical assets that could be sold to raise money to pay the outstanding tax.
• Monthly regular outgoings on living expenses.

HMRC will expect someone to use funds from savings or investments to reduce the tax that is owed.

Any payment plan will also include interest that accrues on late payment.

From 6 April 2025, late payment interest is set at base rate (which is currently 4.5%) plus 4% so that will be 8.5%. It is currently base rate plus plus 2.5% so 7%. Those rates are set high to encourage people to pay promptly.

That was years ago. It doesn’t work like that now. Tax codes are not automatically sent out. Much is paperless via Gateway. Where paperless, changes in tax code are notified by email.

I still receive one.

Sallyforth.
By phone the likely explanation that HMRC will provide is that the tax underpayment arises from bank etc interest received gross.
They will explain that Banks etc provide HMRC with the information about gross interest receipt.
When asked, HMRC will provide/confirm by phone, details of the said bank etc accounts.
Once your mum has that information, she should then have the assurance that the tax calculations are, at least, based upon correctly reported information.

Sallyforth

You are welcome. It’s just a gardening day for me but I have come in for a break from the sun and some lunch.

Tax hasn’t been deducted at source since April 2016. Interest rates started going up again in September 2022 so it could be that.

M0nica

The Mail would make a story out of something like that but for the vast majority of people it wouldn't have made any difference to their tax.

Interest rates were next to nothing for fourteen years after the 2008 crash until the autumn of 2022.

By January 2009 the base rate had dropped to 1.50%. By March 2020 it was 0.10%. It didn’t start rise above 2% until September 2022.

The Personal Savings Allowance of £1,000 tax free per anum was introduced in 2016.

The base rate then was 0.25%. Few banks pay much above base rate. Someone would have had very substantial savings in a taxable account to have earned interest in excess of £1,000. £400,000 at a quarter percent would give you £1,000.

People with that level of taxable savings were almost certain to have already be to be making an annual tax return.

At 2% you’d need £50,000 in taxable cash savings to exceed the PSA. By autumn 2023/23 more people started to earn interest again which would exceed the PSA.

Bank of England base rate history:

www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp

We don’t have to declare interest and pay the tax on it until the deadline, which for 2023/23 was 31 January 2024. Similarly for 2023/24 until 31 January 2025.

For the vast majority of people, HMRC had little need to start looking at taxable bank and building society interest until 15 months ago.

silverbrooks Many thanks for taking the time to explain so clearly how I can a) begin to understand how the shortfall will have been calculated and b) why the shortfall may have occurred. I'll have to read it several times!

I'm thinking it is connected with some interest gained from a savings account. I always thought tax was deducted at source by the bank.

Special thanks for taking the time to reply on this busy Mothering Sunday!

There was an article in The Mail on Sunday saying these bills areappearing because for about the last 10 years the HMRC hve been lackadasiical about checking interest on some investents people have. They know you have the investment but haven't chased up getting the annual returns these companies are meant to submit. They have now done this and you are being charged for interest on investments, you had previsously been receiving interest without tax deduction.

Lovetopaint. Yes, I remember we discussed that at the time.

Sallyforth. Just add up your income, deduct the tax personal allowance of £12,570 and multiple the net amount by 20%. Check your P60, if you have one, to see what tax you paid and the difference is the underpayment.

£90 underpaid is equal to £450 of income that has gone untaxed in the year. Someone with a SP of £250 a week and no other income would end up £90 underpaid.

This is a result of fiscal drag. The tax allowance used to be linked to CPI inflation but Sunak froze the allowance and subsequent chancellors have continued with the freeze. This freeze coupled with the big 10.1% triple lock increase in April 2023 has pulled a lot of pensioners into the tax net.

Many pensioners, especially older women who have inherited SP, or were not contracted out of SERPS, now have a SP in excess of the tax personal allowance. A pension of over £240 a week will put someone over the £12,570 meaning they need a K code as explained above in order to pay the correct amount of tax through PAYE on pay or other pension(s).

M0nica

Go to Citizens Advice or Age UK and ask for advice on this. Thye are far more likely to be able to explain things than we can.

They would just tell you to ring the tax office. There will be a number on the statement.

That's just my experience with AgeUK- my experience with CA is you wait weeks to speak to someone on the phone...

I suspect they have calculated tax on interest on savings above the £1,000 granted by the government. Before this interest was taxed at source. For years the interest rate has been so low that it was unlikely that most people would exceed that limit. However,interest rates rose again a couple of years ago and HMRC are gathering what they can. The letter usually refers to the amount owing as based on a simple tax estimate and figures are given. My dh had to pay around the same amount as your mother. We paid this although savings are in joint accounts. I thought that was it until letters to both of us was claiming over £600 from each of us for 24/25 and this was being coded out until the 1st of April this year. So that was over 3 months.Then they say the coding will change but take into consideration the interest in savings from this last year. As interest rates are going down I hope this will be reflected in the codings of 2026/27. Your mother should have received a simple estimate statement to explain the amount owing.