Pensioners face shock demands from HMRC bank interest checks

The warning came during a Treasury Committee hearing after MPs raised concerns that more older people could find themselves unexpectedly drawn into the tax system.

HMRC said it has been using information supplied by banks on the interest people receive for around 10 years.

But a combination of rising state pensions, the frozen £12,570 Personal Allowance and higher savings rates means more pensioners are now at risk of having tax to pay.

Jonathan Athow, HMRC's director general for strategy and policy, told MPs the tax authority combines information from banks with other data, including state pension payments from the Department for Work and Pensions.

“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.’”

The issue was raised by Conservative MP Dame Harriett Baldwin, who described a case involving a woman in her mid-70s who had previously received a clear assessment from HMRC but later received a demand relating to an earlier tax year.

She asked whether HMRC was increasingly reopening past cases because it was receiving more information about savings interest.

Mr Athow said there was a lag in the system, rather than HMRC deliberately reopening old cases.

He explained that banks do not provide the information until after the interest has been paid, meaning HMRC's end-of-year reconciliation can reveal that tax is owed retrospectively.

“No one has done anything wrong; it is merely that there is a lag in the system, because we do not know what interest people have until the banks tell us, and we then have to put that into the system.”

He said the rise in interest rates in recent years had also resulted in more people receiving enough savings interest to affect their tax position.

More pensioners will interact with HMRC

The warning comes as the Government's decision to freeze tax thresholds means more people are being pulled into the tax system as their incomes rise.

Dame Harriett asked whether more pensioners could end up receiving letters from debt collection agencies.

Mr Athow said there would be more interactions with pensioners, adding that those with private pensions could have tax collected through PAYE, but tax is not currently deducted from the state pension itself.

However, he stressed that debt collection agencies are only used as a last resort.

“We do use debt collection agencies, but that is only a last resort - the idea is not to hand people straight over.”

HMRC chief executive John-Paul Marks also said debts would only be passed to a third party after checks and safeguards had been carried out.

He acknowledged that there could be situations where someone had already settled a bill with HMRC but the payment had not yet been reconciled, meaning a debt collection agency could still contact them.

“It is not impossible,” he told MPs.

HMRC wants more bank data

The hearing also revealed that HMRC wants to make greater use of information supplied directly by banks and other third parties.

Mr Athow said this could eventually mean people would not have to report savings interest themselves because HMRC could calculate the tax automatically.

“We would like to get more data from third parties so that we can get people’s tax right in real time.”

He said the approach could simplify the system, provided HMRC can correctly match the financial information to the right person.

The taxman is also introducing digital reporting for ISAs, which will give HMRC more information about people's savings.

Mr Athow said HMRC's first response to people who accidentally fall foul of tax rules would be education rather than punishment.

“Our approach will always be to educate people. A lot of the problems that we see are not a deliberate misuse of the system; it is people not understanding the requirements.”

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However, he accepted that the number of pensioners interacting with HMRC is expected to rise.

For older people who have never previously had to deal with the tax system, the prospect of receiving an unexpected bill can therefore come as a shock.

The Government is also expected to set out in the Budget how it will deal with the basic new State Pension once it exceeds the tax-free allowance. HMRC told MPs that ministers are still considering the technical options for implementing the policy.