The UK's tax authority has issued a staggering 1.3 million extra demands for unpaid income tax, with pensioners and savers among those hit by surprise bills. The surge is a direct consequence of the government's policy to freeze income tax thresholds, a move that is dragging more people into the tax net or into higher bands as their earnings or pensions increase with inflation.
The Numbers Behind the Tax Demand Surge
According to data obtained by The Times via a Freedom of Information request, more than 1.32 million people received 'brown letters' from HMRC in the 2023-24 financial year, informing them they owed tax. This figure has nearly doubled from the 675,000 such letters sent out just two years earlier in 2021-22.
The core of the issue lies in the frozen thresholds. The point at which you start paying the basic 20% rate of income tax has been locked at £12,570 since 2021. The higher-rate threshold (40%) remains at £50,270, and the additional-rate threshold (45%) at £125,140. As wages and pensions rise, but the thresholds do not, millions find themselves paying more tax than they anticipated.
Pensioners Bear the Brunt of Frozen Allowances
Former Pensions Minister Steve Webb, now a partner at consultancy LCP, highlighted the severe impact on older citizens. "The continued freezing of the income tax personal allowance means that the numbers getting unwelcome end-of-year tax demands have soared," he stated.
He explained that many affected individuals are pensioners whose sole income is the state pension. Due to the freeze, the rising state pension is now pushing them over the tax-free personal allowance, generating an annual tax bill that grows larger 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," Webb added.
LCP forecasts that the problem will worsen, predicting that the number of people receiving these 'simple assessment' tax demands will surpass two million when the figures for the 2024-25 tax year are released.
Government's Pledged Response from 2027
In response to growing pressure, Chancellor Rachel Reeves announced a partial solution in last year's autumn budget. She committed that, from April 2027, individuals whose only source of income is the state pension will be exempt from having to complete a tax return or pay income tax on it.
Speaking to broadcaster Martin Lewis, Ms Reeves said: "So if you just have a state pension and you don’t have any other pension you don’t have to fill in a tax return. I make that commitment for this Parliament." She acknowledged the timeline, noting 2027 was when the issue was projected to become critical for many, and stated the government was "working on a solution... to ensure we’re not going after tiny amounts of money."
However, this pledge leaves a significant gap for those with modest private pensions or savings income alongside the state pension, who will continue to face unexpected tax demands until a broader review of the frozen thresholds is undertaken.
