Officials have admitted that state pensioners are increasingly receiving tax letters over their savings interest, as banks share data with the taxman
Pensioners could find themselves on the receiving end of legal letters about their savings, HMRC officials have conceded. The tax authority informed a committee of MPs that individuals are increasingly likely to be targeted, owing to the freeze on the personal tax threshold alongside frozen interest tax bands.
Officials also told the Treasury Committee that banks are forwarding details of state pensioners’ savings directly to HMRC — with many now facing tax demands for the very first time.
Dame Harriett Baldwin raised the case of one of her constituents, a pensioner in her mid-70s, saying: “Suddenly got a demand for a past year-something like two or three years ago-based on bank data. Are you suddenly getting a lot of cases open retrospectively because you are now receiving more information on savings interest from banks? Is that something that is happening?”.
HMRC Director General for Customer Compliance Group Penny Ciniewicz responded that officials are “Certainly using bank and savings data more than we used to.”
The growing number of pensioners being pursued is a direct consequence of the frozen personal allowance, with rising interest rates and inflation pushing increasing numbers of people beyond the threshold. The Personal Savings Allowance (PSA) permits individuals to earn a certain amount of interest on their savings each tax year without incurring UK income tax.
The allowance varies depending on an individual’s Income Tax bracket — basic-rate (20%) taxpayers can earn £1,000 of tax-free interest, while higher-rate (40%) taxpayers are entitled to £500 of tax-free interest. Jonathan Athow, Director General of Strategy and Policy at HM Revenue and Customs, said: “For about ten years now, banks have sent us data on the interest people have received. We will put that together with other information we know. If you are a pensioner, say you have savings interest in a state pension from DWP; DWP will tell us how much pension you are getting, and we will then understand how much interest you are getting.
“If that is below the personal allowance, we do not contact somebody, but if it is above the personal allowance, we will write to them saying, ‘There is this bill that you need to pay.'”. Dame Harriett asked: “Are you suddenly doing more of that retrospectively?”
Mr Athow replied: “There are two things: the state pension has been increasing relative to the personal allowance, which we have already discussed; and two or three years ago interest rates went up, meaning more people were getting more interest. In the past couple of years, therefore, we have seen that, as we do the end-of-year reconciliation – which normally happens in the summertime following the April – it is for the year before.”
The committee was further informed that HMRC has yet to finalise how it will handle pensioners who exceed the personal tax threshold of £12,570 as a result of the triple lock. The Government has committed to ensuring that those receiving only the new full state pension — which is set to surpass the point at which tax liability begins next year — will not be required to pay tax.
Mr Athow stated: “The Chancellor has indicated that the arrangements for that will be set out in the Budget.” Dame Harriet responded: “So you have worked it out, but it will not be announced until the Budget?”.
Mr Athow replied: “The Chancellor has said that the Budget is when that will be set out, and that is what we are expecting.”
The matter of individuals receiving legal correspondence regarding tax payment for the first time was brought up. Dame Harriett mentioned a pensioner who received a demand from a law firm.
She enquired: “I just wondered, Ms Ciniewicz, if you are using law firms more and how often you reconcile that data. Is that something that you are using more, particularly with regard to pensioners?”.
Dame Meg Hillier, the committee chair, asked: “As a general rule, do you outsource chasing a debt to law firms, or is it something that could be a scam? Do you have any message for taxpayers if that were to happen?”
John-Paul Marks, First Permanent Secretary and Chief Executive of HM Revenue and Customs, explained: “On debt, it is the case that the Government have funded additional capacity in debt-collection agencies to support our debt operation. Debt will only be passed to a third party after a whole bunch of checks and safeguards have gone through, so it is possible that in that situation, the customer resolved the debt with us, but that had not yet reconciled.”
Dame Harriett added: “Am I right to be worried that more and more pensioners across Great Britain and Northern Ireland are going to be getting letters from debt collection agencies and suddenly interacting with a tax system that they have previously not had to worry about?”
Mr Athow said: “There are going to be more interactions with pensioners, and more people will be brought in. As I said, there are particular challenges. If they have a private pension, we would collect the tax through that, but no PAYE is worked on the state pension, so that means we have to ask people for the money. There is going to be more of that, but we can also write to you about how the customer journey works.
“We do use debt collection agencies, but that is only a last resort-the idea is not to hand people straight over. We can explain the process and hopefully give you reassurance on how that will work. We write to more pensioners to say that, because of their pension and interest, there is tax to be charged.”
