In a surprising move, HM Revenue & Customs (HMRC) has begun sending out letters to UK households demanding their bank details to facilitate free government pension payouts. These payments, which will not be added to pension pots, are designed to correct an imbalance in tax relief applied to workplace pension contributions for those earning under the personal allowance threshold of £12,570. Eligible individuals will receive a direct payment into their bank accounts equivalent to the 20 percent pension relief they would have received in a Relief at Source (RAS) scheme.
This initiative particularly targets workers earning less than £12,570 per year who are enrolled in a net pay pension scheme through their employer. HMRC will start writing to those eligible and requesting their bank details to make the payment. However, concerns have been raised about the communication surrounding this initiative.
Hymans Robertson, a consultancy firm, emphasized the need for employers to ensure that low-paid staff are aware of the letters from HMRC, as many may regard them with suspicion and potentially miss out on this tax relief. Hannah English, head of DC corporate consulting at Hymans Robertson, highlighted that the extra cash is not coming from employers. "Employers should seize this unique opportunity to give their employees a boost of income without any expense on their balance sheet. It’s an easy step for employers who are facing stagnating growth, and an increase in national insurance contributions, to help their staff," she stated.
English further noted, "Staff could easily disregard a letter from HMRC and miss out on the top-up, which would provide additional income during the current cost-of-living crisis. While this small detail may not sound like it has the potential to move the dial on the gender pay gap, it could certainly nudge it in the right direction. If all those eligible for these top-ups claim them – three quarters of whom are women – this could see a positive shift in the gender pay discrepancy."
In another instance of HMRC's controversial practices, the agency has faced backlash for allegedly "harassing" families over inheritance tax bills that had already been settled. Sarah Jones, a 63-year-old woman, shared her distress after HMRC claimed she owed more than £50,000 in inheritance tax, despite having paid the bill. Her ordeal spanned four years, culminating in her paying off a £56,540 inheritance tax bill in early 2021 alongside her brothers.
Despite settling the payment, Jones described receiving an unexpected call in 2023, which she initially thought was a scam. "Someone called us up and gave us a bank number – it could have been his for all we knew," she recounted. Following the payment, Jones was bombarded with letters demanding payment for the same amount, leading her to feel harassed. "It was traumatic. We thought we’d put it all to bed. But then years later we had to keep discussing [my father’s] death. It felt like harassment. HMRC said we had to pay as soon as possible," she explained.
The situation escalated as every attempt to rectify the misunderstanding resulted in hours spent on hold. "Every time we would phone to explain that we had paid. But it took us two hours to get through each time. We stopped reading the letters in the end because they were so ridiculous," Jones said. Eventually, HMRC identified the issue as a duplicate account registered in her name, differing from her original account by only one digit.
Jones recounted her conversation with the customer service representative: "The person we spoke to – Matthew – was a bit sorry. He said 'It's now down on the system as paid and I'll write you a letter to confirm it.'" However, when she inquired about compensation for the distress caused, she was told, "We don’t do compensation." Jones expressed relief that the issue was resolved, but described the experience as a "complete balls-up."
Tax expert Gary Rycroft criticized HMRC’s handling of such cases, pointing out the agency's error-prone nature and poor communication channels. He expressed strong opposition to any proposals that would grant HMRC more power to directly deduct payments from bank accounts, stating, "Accordingly, any granting of power to HMRC to allow them to deduct payments directly from a taxpayer's private bank account is not welcome." Rycroft raised concerns about the potential for serious financial disruption and privacy violations, adding, "Never mind the myriad of privacy law and data protection issues, imagine on a more practical level a payment is deducted which prevents you from paying your mortgage or other important bills. And the months it would take to get HMRC to pay back any tax they owe you which was taken in error."
In addition to these issues, HMRC has also targeted savers in recent months, sending letters to thousands of individuals with more than £3,500 in their accounts. These notifications warn that their interest earnings may have exceeded the Personal Savings Allowance (PSA) and could be subject to tax. With rising interest rates pushing many savers above the tax-free threshold, unexpected tax bills are becoming a reality for individuals across the UK.
The PSA allows basic-rate taxpayers to earn up to £1,000 in interest tax-free, while higher-rate taxpayers can earn up to £500, and additional-rate taxpayers have no allowance. As savings interest rates rise, many individuals are finding themselves in a position where they must pay tax on their interest earnings. For instance, a saver with £20,000 at a 5% interest rate would earn £1,000, hitting the PSA limit for basic-rate taxpayers.
HMRC has indicated that P800 tax calculations, which typically notify taxpayers of any tax owed, are delayed until March 2025 due to an increase in savings interest data. This delay means that many individuals may not realize they owe tax until just before the new tax year begins.
To manage their tax liability effectively, individuals are advised to regularly review their interest earnings and utilize tax-efficient accounts, such as ISAs (Individual Savings Accounts), which allow for tax-free savings up to £20,000 per year. Tax experts recommend being proactive in managing savings to avoid unexpected tax bills and to stay compliant with HMRC regulations.
In light of these developments, it is crucial for individuals to stay informed about their tax obligations and to take advantage of available tax reliefs and allowances. As HMRC continues to navigate the complexities of tax collection and compliance, taxpayers must remain vigilant and proactive in managing their financial affairs.
