'Why has HMRC slashed our tax-free allowances?' Jasmine Birtles explains tax on pension rules

Jasmine replies: That does sound confusing. Taxation is often not at all straightforward to work out!

This is why I contacted a specialist in the field, Tom Minnikin, who is a partner at the tax consultancy Forbes Dawson.

He said: “The first point to note is that the state pension is a taxable source of income.

"This is despite the fact - as the tax office has correctly stated - the Department for Work and Pensions (DWP), which administers the state pension, does not operate Pay As You Earn (PAYE). This means the state pension is received gross without any tax collected at source.

“For a pensioner with no other source of income, things are straightforward because the state pension – currently around £11,500 – is less than the personal allowance of £12,570, meaning they have no tax to pay.

"However, for individuals with other sources of income, such as interest on savings, or private pensions, their total income may exceed the personal allowance, resulting in them owing tax.

“As workplace pensions are taxed at source under PAYE, HMRC will issue the administrator with a tax coding notice.

"Most people will have a tax code of 1257L which tells the person operating PAYE they can apply the full personal allowance when calculating what to deduct.

"It sounds like the tax code has been reduced in this case to remove that part of the personal allowance which is being allocated to the state pension.

“This is logical and does not mean they have lost their personal allowance. It is just that it is being allocated to the state pension in priority because this income cannot be taxed at source.

“Unfortunately, owing to a combination of the personal allowance being frozen since April 2021, and significant increases in the state pension brought about by high inflation, we are seeing more and more pensioners being dragged into the position where they have to pay tax on their private pensions.

"The impact in this case looks stark, but without further information it is difficult to tell if there are other factors at play.

“I recommend the reader contacts HMRC and asks them for a full explanation in writing of their tax code. If the individual believes the coding notice is wrong, they can appeal to get it changed.”

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Another thing you could do is to contact the Low Incomes Tax Reform Group (LITRG), which is an initiative run by the Chartered Institute of Taxation (CIOT) to help those without professional tax advisers.

They have useful information on their website, including explaining how pensions are taxed.

There are also organisations out there, like Tax Aid, Tax Help for Older People and Age UK, which may be able to help you if you are still getting nowhere with HMRC.

Jasmine Birtles is a personal finance expert, TV and radio presenter and author of 38 books. Her website, MoneyMagpie.com, covers all aspects of personal finance from money-saving and money-making ideas to investment and pensions information. She is a keynote speaker at conferences around the world.