Contents
Foreword |
|
Executive summary |
|
Chapter 1 |
Introduction |
Chapter 2 |
Methodology of the pensioner tax
review |
Chapter 3 |
Areas of complexity |
Chapter 4 |
Priority areas for further review
and consideration of reform |
Annex A |
Pensions and pensions tax reliefs:
some historical notes |
Annex B |
International comparisons |
Annex C |
List of common HMRC forms for
pensioners |
Annex D |
The pensioner population in the
UK |
Annex E |
The evidence gathering
process |
Foreword
There is no such thing as a typical pensioner. They may be single
or married; above or below sixty five; in work or taking their
leisure; with or without a pension; with or without savings or
investments.
It's against this backdrop that successive 20th and
21st century Chancellors have had to try and devise a way
of taxing this diverse group of individuals, whose needs change with
the advancement of their years. Over time the age of a pensioner,
their marital status and even modest savings provision have had their
influence on the development of the tax regime which is now applied
to this group of people.
The result is a patchwork of allowances and rules which many in
their later years find very confusing, especially if during their
working lives they have had the benefit of their personal tax affairs
effectively being on "autopilot" through the use of the pay
as you earn (PAYE) system.
For some, the arrival of a combination of their state pension and
a limited income from their savings and investments can mean for the
first time that they need to complete a self assessment tax return,
just when they thought that life was getting easier.
It was against this background that we were delighted when the
Chancellor accepted our recommendation that the Office of Tax
Simplification (OTS) be tasked with producing a report about how life
could be made easier for the 5 million pensioners currently affected
by the tax system.
During the last 6 months we have worked closely with a broad range
of organisations - the media, (both print and broadcast), our
excellent Consultative Committee and individual pensioner taxpayers -
to complete part one of our work: namely to identify where the
biggest problems currently lie. To that end we were particularly
grateful to Tax Help for Older People whose casework files greatly
added to our understanding of the real world problems that this group
of taxpayers are facing.
For those with knowledge of this area of taxation our key findings
should come as no surprise. It is the operation of the age allowance,
the tax status of the state pension and the way the system deals with
certain types of savings income that causes the greatest confusion.
However, as you read this report you will also see that we have
unearthed some more obscure problems, which also require
attention.
In the second part of our work in this area we will address the
challenge of how this section of our tax code can be made simpler for
those pensioners who pay tax. To this end your thoughts and
observations on our proposals to date would be very much appreciated.
We will look at each area of “complexity” with a view to
proposing either a simplification of the tax code or an improvement
in the way HMRC's administration works as far as the taxpayer is
concerned.
Once our work is completed, it will provide Ministers with an
opportunity to reflect on whether they are satisfied that improving
the current system is the most appropriate way forward or whether
they should look at how this area of tax law operates, as a whole, in
a world where pensioner numbers are increasing and life expectancy is
rising.
None of this report could have been written without the efforts of
our small team of experts. In particular I would like to thank Kelly
Sizer, who has led the project whilst on part time secondment from
the Low Incomes Tax Reform Group. She was particularly helped from
within OTS by Tunde Ojetola and Richard Thomas, whose practical HMRC
experience provided an invaluable source of information and advice
for the project.
Although the “half time” whistle has blown on our work
in this area I can assure you that our team are anxious to get back
on the pitch so that they can begin work on providing practical
solutions that will really make tax simpler for the rising number of
pensioner taxpayers.
Rt Hon Michael Jack
Chairman
Executive summary
The Office of Tax Simplification (OTS) is pleased to present this
interim report on pensioner taxation.
As we explain in the introduction, we have broadly identified the
'pensioner' population as those aged 60 or over
for the purposes of our review, unless otherwise stated. Pensioners
are, however, a far from homogeneous group in terms of age,
circumstances and capability to deal with tax matters.
We stress that our immediate objective, before Budget 2012, was to
identify and explore the areas of complexity. Therefore, whilst a
wide range of options for reform – some potentially contentious
– have been raised, discussed and noted, we have not yet
formulated recommendations for substantial or radical change.
Some of the issues we discuss affect a wider range of taxpayers
than just pensioners, but are those that may pose particular
difficulties for pensioners. Other issues affect just pensioners, and
indeed differences between the treatment of pensioners and other
taxpayers are a major source of complexity.
We thought it necessary to understand the historical context for
having those differences – such as higher age allowances
– and to give some thought to whether the same rationale is
valid today. We have also carried out some initial research into tax
systems overseas to see how other jurisdictions treat pensioners,
which will be useful in informing the second stage of our review.
Our work also has to be set in the context of demographic and
broader policy changes. People may be working longer, perhaps at the
same time deferring taking their pensions (whether state or private).
Compulsory retirement ages are disappearing, auto-enrolment is being
introduced, the state pension age is increasing and the basic
personal tax allowance is increasing gradually towards £10,000,
which effectively diminishes the value of age-related allowances.
Furthermore, tax policy change is ongoing, with consultations on
modernising the personal tax systems and improving transparency,
developments with PAYE Real Time Information (RTI) and merging the
operation of income tax and national insurance all being especially
relevant.
However, as some of those changes are longer term ideals (for
example taxpayers having their own online HMRC account as envisaged
in the transparency consultation), the OTS does hope to identify some
changes which could be made much sooner to improve pensioners'
dealings with the tax system.
We have outlined the areas of complexity in detail in Chapter 3 of
this report. For ease of reference, we have provided a summary table
at the beginning of Chapter 4 which shows:
- which areas we have identified as being of high, medium or low
priority for the second stage of our review;
- areas in which we have noted that HM Treasury, HM Revenue and
Customs (HMRC), and/or the Department for Work and Pensions (DWP)
are already carrying out work; and
- any immediate suggestions we have for improvement, based upon
our findings to date.
Chapter 4 then explains in a little more detail our thoughts on
prioritisation of each area of complexity.
By the completion of the second stage of our review, we hope to be
in a position to make detailed recommendations. To help inform that
second stage, we would welcome contributions from readers on any
aspect of this report. We particularly encourage submission of any
suggestions as to what might be done to ease the complexities we have
identified in this first stage.
You can email the review team at OTS-pensions@ots.gsi.gov.uk
1 Introduction
Aim of the review of pensioner taxation
1.1 In July 2010, the Chancellor of the Exchequer announced
the creation of the Office of Tax Simplification (OTS). Following its
initial reviews, the OTS wrote to the Exchequer Secretary to HM
Treasury, David Gauke MP, on 14 June 2011 setting out possible areas
of future work1. We received the Minister's
response on 5 July 2011, which invited us to work on two of our
proposals: pensioner taxation and employee share
schemes.2
1http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/d/ots_letter_michaeljack_to_davidgauke_14062011.pdf
2http://www.hm-treasury.gov.uk/d/ots_letter_050711.pdf
1.2 In the area of pensioner taxation, the Minister agreed
to our suggestion of producing an interim report before Budget 2012
identifying and examining the areas of the tax system which cause the
greatest complexity for pensioners, and looking at how the problems
vary across the pensioner population. He asked that we put forward
proposals for simplification in a final report later in the year.
1.3 In this interim report, whilst we have sought to
identify whether there are any immediate changes which could offer
simplification, we are mindful of the need to conduct a thorough
review and produce properly formulated proposals. Accordingly, in a
number of areas we have identified possible solutions but these
should not be read as recommendations at this stage: rather, they are
areas to explore further. We would welcome comments from interested
parties on the various suggestions.
1.4 There are longstanding issues in the area of pensioner
taxation. We have found it instructive to trace back the history of
taxation as it affects pensioners in the UK and how, for example,
special rates of personal allowances for older people have come to
exist. Annex A of the report outlines our historical research. This
highlights that the system we see today is the product of a complex
series of past events and policy decisions. It is clear that, if
starting now with a blank canvas to design a tax system for
pensioners, a very different picture would be likely to emerge.
Indeed, a fundamental question is whether different tax rules for
pensioners are necessary at all. Differing rules will almost always
risk increases in complexity.
Terms of reference
1.5 The full terms of reference for the pensioner tax
review were published on the OTS website in the autumn of
20113, and they are:
Box 1.A: Pensioners’ tax review – terms of
reference
The taxation of pensioners is often seen as overly complex,
with many pensioners subject to PAYE before retirement, but
self assessment afterwards, when they may have several small
sources of income that may or may not need tax
deducted.
The Government has therefore commissioned the Office of Tax
Simplification to conduct a review of the system of pensioner
taxation and make recommendations to the Chancellor on how to
simplify the tax system and ease tax administration for
pensioners.
The Office will provide an initial report to the Chancellor
by Budget 2012 that:
- examines evidence and identifies the areas of the tax
system that cause the most complexity and uncertainty for
pensioners;
- identifies how these issues vary within the pensioner
population; and
- explores what changes could achieve simplification and
what the wider implications of these might be.
In particular the review should:
- draw on evidence provided by pensioners, tax
professionals, the pensions industry and representative
bodies; as well as analysis of taxpayer data and academic
research; and
- consider all HMRC taxes and compliance responsibilities
that impact on pensioners, including the administrative
burdens imposed – however, inheritance tax and tax
relief for pension contributions are not within the scope
of this review.
If the review of evidence presents a case for change
then the Office will go on to produce a final report later in
2012 with specific recommendations. Both the interim report
and final recommendations should have regard to:
- the Government's work on merging the operation of
Income Tax and NICs;
- other work within Government, such as the coalition
commitment to increase the personal allowance and the flat
rate state pension, as well as related reports by the
National Audit Office and the Public Accounts
Committee;
- the wider economic and policy implications of any
proposals – including impact on individual
pensioners, fairness between different taxpayers, wider
Government policy and tax receipts;
- the risk of non-compliance and avoidance opportunities;
and
- the Spending Review resource constraints on HMRC.
The Office's work will be informed by consultation
with interested parties, including forming and working with a
Consultative Committee
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3http://www.hm-treasury.gov.uk/d/ots_pensioner_taxation_tor.pdf
1.6 It is important to note from the above that tax relief
on pension savings and inheritance tax matters were specifically
excluded from the scope of our review. However, we have touched on
the tax implications of drawing funds from pensions, particularly for
those with small pension savings.
1.7 A Consultative Committee for the review was formed in
September 2011, terms of reference for which were also published on
the OTS website4. The names and organisations of
members of the Committee are given at Annex E.
4http://www.hm-treasury.gov.uk/d/ots_pt_ConsultativeCommittee.pdf
Definition of a 'pensioner'
1.8 The term 'pensioner' is a broad one. Retirement
and working ages are increasingly blurred and there are wider changes
in progress to be taken into account, for example changes to the
state pension age, abolition of the default retirement age and
demographic changes.
1.9 For the purposes of data-gathering for the pensioner
tax review, the OTS decided that we were looking at people aged 60 or
over, who are either in receipt of 'pensions' (including the
state pension) or are otherwise retired and living wholly or partly
off investment income, which might be a return from savings, rent
from property or other unearned income. In either case, they might
also have some part-time earnings: we have been at pains to include
the older worker in the scope of our review.
1.10 However, we acknowledge that there are issues for
younger pensioners, for example those retiring from the armed forces
or police. Also, within the 60-and-over age range there is a wide
variety of people with different issues, needs and levels of
capability to understand and comply with tax obligations.
1.11 Given this breadth of potential for our review, it is
perhaps inevitable that our findings touch not only on issues that
affect pensioners alone, but also areas which cause complexity for
many others within the taxpaying population. Where relevant, this
report acknowledges those broader impacts.
1.12 In general, then, the term 'pensioner' used in
this report should be read as applying to all the various
constituencies above, except where specified to the contrary.
What is meant by tax simplification?
1.13 The past reports produced by the OTS have looked at
what might be considered 'simplification'. As many of the
areas of complexity for pensioners arise as a result of the special
reliefs and allowances that are available to them, we have referred
back to our review of tax reliefs for a reminder of simplification
principles.
1.14 Chapter 3 of our tax reliefs interim
report5 outlined those principles. Taking into
account our research, in summary our reliefs review focused on:
Box 1.B: Simplification principles from the OTS review
of tax reliefs
The policy rationale: A number of tax reliefs have been
introduced over the years to fulfil a specific purpose, or to
help a certain industry in need. We will examine whether
there continues to be a policy rationale behind a relief and
also whether the relief is the best way to deliver the
aim.
Evidence of taxpayer take up, which may be a proxy for
the perceived value of the relief. This is a function of
understanding, complexity and whether the legislation is too
tightly focused.
The tax cost of the relief is also a key factor which we
take into account but it is not by any means the key
driver.
The administrative burden for the taxpayer, adviser and
HMRC; determining for each relief which aspects take up the
most time and resource. This includes the legislation itself,
the volume of changes, the procedures and documentation
required for dealing with HMRC or other bodies, and the work
HMRC has to undertake to monitor claims.
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5http://www.hm-treasury.gov.uk/d/ots_review_tax_reliefs_interim_report.pdf
1.15 In the context of the pensioner review, it is also
helpful to restate the features of good tax law and practice outlined
by Graeme Cooper in 19936:
Box 1.C: Cooper’s view of the key features of tax
simplification
- Predictability – legislation and its scope should
be easily and accurately understood by taxpayers and their
advisers.
- Proportionality – the complexity of the solution
should be no more than reasonably necessary to achieve the
stated aim.
- Consistency – similar issues should be dealt with
in the same way and without the need to make arbitrary
distinctions.
- Compliance – it should be easy for taxpayers to
comply without incurring excessive costs.
- Administration – it should be easy for a revenue
authority to administer.
- Coordination – it should fit appropriately with
other tax rules.
- Expression – it should be clearly expressed.
|
6G.S. Cooper “Themes and issues in tax
simplification” Australian Tax Forum Vol 10 pp 417 - 460
1.16 All of the above are of relevance to the pensioner
review.
1.17 For example, in the context of different age
allowances for older people, in order to consider simplification
under the 'proportionality' heading above, we
first need to know the aim of having such allowances. In turn, that
would allow us to consider the issue of consistency by questioning
whether the distinction is arbitrary in the modern context.
1.18 We have also carried out a range of work on how the
tax system for pensioners is administered. For example, we have
considered the range of tax-related forms a pensioner might be faced
with (Annex C refers), how the tax distinctions between working age
and pension age are coordinated across Government, how the special
tax provisions for pensioners are expressed in guidance and what
support is available when changes occur in their circumstances.
2 Methodology of the pensioner tax review
2.1 The first steps in our review were to identify those
areas causing complexity. This we have done in Chapter 3 of this
report, before going on to look at which of those areas should be
prioritised for further review and reform (Chapter 4).
2.2 As with other exercises that the OTS has carried out,
we have laid great stress on evidence gathering, so that our
recommendations are firmly evidence-based. We have tried to make sure
the work we are doing is well-publicised in relevant areas and with
appropriate bodies. We have engaged with advisers to pensioners both
from the voluntary sector and the paid agent community at various
meetings around the UK (see Annex E), discussed our review within
Government and sifted through written contributions from individual
pensioners1. Coupled with our own researches, we
compiled a list of areas for review. Within each area, we identified
specific issues, forms or administrative processes which contribute
to complexity and we listed any ideas put forward for reform.
1Many of these contributions have been
generated following coverage of our work in the media. We are
grateful for the constructive and positive way that many media
outlets have highlighted our aims and the project generally.
2.3 In all of this work we have been greatly helped by our
Committee members (see Annex E) who have also been of great
assistance in helping us link to a range of external bodies.
2.4 Some of the areas for review could be simplified by
changes in policy and legislation, and some by improved
administration. Within some areas, both the underlying policy and the
administration cause problems.
2.5 HMRC has kept us informed of changes that are already
in progress which might help improve the administration of the tax
system for pensioners. We have referred to HMRC's current work
throughout the report, where relevant to the issue under
discussion.
2.6 In Chapter 3, we set out the areas of complexity,
differentiating between those affecting pensioners only and others
which have wider impact but nonetheless impact heavily on
pensioners.
2.7 After having gathered details of the complexities of
pensioner taxation, the OTS sought to prioritise those areas to which
precedence should be given in the second stage of our review. Those
priorities are summarised and explained in Chapter 4, based on our
findings.
2.8 We have given a priority rating of high, medium or low
to the various areas. Within each area, we first address matters
requiring policy attention or changes in legislation, and then we
look at administrative simplifications.
2.9 We must stress this does not mean that the OTS is not
prepared to consider those areas which we have concluded to be of
lesser priority if we have the time, resources and support of
Ministers to do so. Some of the low priority areas may easily evolve
into a simple measure or recommendation, although more work would
clearly make any recommendation more authoritative.
2.10 Some priority areas have become clear simply because
they were a recurring theme from the various meetings we have held,
or in written submissions to us.
2.11 We also wanted to ensure that we had captured the
views of our Consultative Committee on the areas they thought were
high priority, given that its members were recruited for their depth
and breadth of expertise in the field of pensioner taxation. Between
21 December 2011 and 6 January 2012, we conducted an online survey of
our Committee members.
2.12 The survey results, combined with the research we have
undertaken and other evidence we have gathered have helped us to
prioritise each area.
2.13 Whatever the priorities the OTS has set out, we
welcome comments from readers of this report on any aspect of the
contents. We especially welcome views as to how we make progress on
the areas covered, and comments on the ideas and suggestions listed
in Chapters 3 and 4, which we have not yet formulated into final
recommendations.
2.14 Both Chapters 3 and 4 are divided into the following
headings:
A. Age-related allowances
B. Married couple's allowance
C. Sundry reliefs
D. Blind person's allowance
E. Savings taxation
F. The state retirement pension and its interaction with
certain other benefits
G. Welfare benefits, other than the state retirement pension
H. Accessing funds in small pension pots
I. Overseas pensions paid to UK residents
J. Collecting tax – PAYE
K. Collecting tax – self assessment
L. Support for bereaved pensioners
M. National insurance contributions
N. Other administrative issues
O. Gift aid
P. Care and support employers
Q. Capital gains tax
R. Foreign income, other than pensions – non-UK domiciled
pensioners
S. Pensioners retiring abroad
3 Areas of complexity
3.1 The areas of complexity identified by the OTS are
considered in turn in this Chapter. For the next stage of the review,
we welcome views and comments on the findings, ideas and suggestions,
none of which we have formulated into final recommendations.
A. Age-related allowances
Box 3.A: Personal allowances
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|
Personal allowances are currently set as follows:
|
2011/12
|
2012/13
|
|
£
|
£
|
Basic personal allowance
|
7,475
|
8,105
|
For those aged 65 to 74
|
9,940
|
10,500
|
For those aged 75 and over
|
10,090
|
10,660
|
3.2 We refer here to the higher rates for those aged 65 and
over as 'age-related allowances'. Those allowances are
withdrawn by £1 for every £2 of 'adjusted net
income1' over £24,000 for 2011/12, until
they reach the basic personal allowance2.
1Section 58 of Income Tax Act 2007
2So for those aged 65 to 74 the difference
between the age-related allowance and the ordinary personal
allowance is £2,465. By doubling that (£4,930) and adding
the result to £24,000 we find that a person aged 65 to 74 with
an income of £28,930 or more gets no age-related allowance.
For those aged 75 and over, this figure is £29,230.
3.3 The basic personal allowance is now subject to
tapering, down to nil, for those with incomes exceeding
£100,000, but the OTS has considered that matter outside the
scope of this review, given that it affects all taxpayers and we have
not heard of it causing any special complexity for pensioners. It is
a possible issue for a wider review of personal allowances.
3.4 The complexities of the age-related allowances are
numerous:
- not everyone is aware of them before they become a
pensioner;
- the taper of the allowances is unfamiliar to pensioners caught
within its ambit, as no similar mechanism will have operated to
restrict the basic personal allowance during their working life.
The tapering of personal allowances for those with incomes over
£100,000 is unlikely to alter this familiarity issue for the
majority of new pensioners, as it will only apply to a minority of
higher earners;
- by removing £1 of allowance for every £2 of income
over the threshold, the taper of the allowances creates a marginal
tax rate of 30% for those within its bracket; the tax rate drops
back to 20% thereafter until the taxpayer's income reaches the
higher rate threshold. For instance, an extra £200 of income
over the threshold is taxed at 20%, i.e. tax of £40. It also
removes £100 of age-related allowance, creating a further tax
charge of £100 at 20%, i.e. £20. The total additional tax
is therefore £60, which equates to a 30% effective rate;
- the calculation of taxable income for the purposes of
calculating the taper is adjusted for various items such as gift
aid payments and pension contributions, which makes its calculation
complex;
- the taper interacts with tapering of the married couple's
allowance (see section B of this Chapter, below), where that relief
is also claimed, making the calculation even more tortuous for
older taxpayers;
- the difference between the two levels of age allowance is now
small, yet having two different rates contributes to
complexity;
- the age allowance has to be claimed3 and the
HMRC's processes for so doing are not infallible, sometimes
leading to the allowances going unclaimed for many years, with tax
being overpaid as a result;
- the tapering of the allowances makes it almost impossible to
collect accurate amounts of tax in-year, thus requiring an end of
year adjustment. It is therefore HMRC's policy to keep in the
self assessment system many taxpayers within the tapering
band4; and
- the entitlement to additional allowances at age 65 and 75
respectively is out of step with the state pension age, and changes
thereto.
3This is a statutory requirement rather than
an administrative one. See Sections 36(1) and 37(1) Income Tax Act
2007
4See HMRC Self Assessment Manual ref SAM100050
(www.hmrc.gov.uk/manuals/sammanual/sam100050.htm)
3.5 The OTS has explored the history of age-related
allowances (see Annex A), so as to review the original policy
rationale and how it fits into a modern context.
3.6 From the data available to us, there are some 10.3
million people aged 65 and over in the UK5. This
represents 16.63% of the total UK population, some 62.4 million at 1
January 2011. As might be expected with current demographic trends,
both the number of people aged 65 and over, and the proportion of the
total UK population they represent has been increasing, from 8.4
million (15%) in 1981, to 9 million (15.75%) in 1991 and 9.3 million
(15.83%) in 2001.
5http://appsso.eurostat.ec.europa.eu/nui/submitViewTableAction.do
3.7 From HMRC data, in 2007/08 we believe there were some
4.79 million taxpayers claiming age-related allowances, 3.56 million
receiving the full, untapered amount, 419,000 receiving a partially
tapered amount and 807,000 whose age-related allowance was fully
tapered. This leaves some 5.51 million aged 65 and over who are not
receiving age-related tax allowances. This may be because they are
not taxpayers and therefore not identified within HMRC's systems
as claiming the age allowance, but there will almost certainly be
some who are entitled to the allowances but who have not claimed
them.
3.8 The National Audit Office have previously raised the
issue that age-related allowances may be
under-claimed6, and the House of Commons Public
Accounts Committee reinforced this by recommending that HMRC should
attempt to assess how many such allowances go
unclaimed7. HMRC could follow up this
recommendation by seeing how using its systems to identify, and then
make contact with, pensioners who may be entitled to age-related
allowances but have not claimed them. This may be facilitated by the
National Insurance and PAYE Service (NPS) database offering improved
functionality, compared with the previous system.
6National Audit Office report, October 2009:
“HM Revenue and Customs, Dealing with the tax obligations of
older people” – see Executive Summary paragraph
14b.
http://www.nao.org.uk/publications/0809/dealing_with_the_tax_obligatio.aspx
7House of Commons Committee of Public
Accounts, Eleventh report of session 2009/10 published 25 February
2010 – see Conclusions and recommendations point 3.
http://www.publications.parliament.uk/pa/cm200910/cmselect/cmpubacc/141/141.pdf
3.9 Furthermore, HMRC data for 2009/10 shows that 320,000
pensioners are in self assessment and have their age-related
allowances tapered (282,000 with age-related personal allowance
tapered and 38,000 with tapered married couple's allowance).
3.10 Questions were put forward by those consulted in this
first stage of our review as to the Government's intentions for
age-related allowances when considered against the pledge in the
Coalition Agreement to increase the basic personal allowance to
£10,0008.
8The Coalition: our programme for government,
May 2010, Section 29
http://www.cabinetoffice.gov.uk/sites/default/files/resources/coalition_programme_for_government.pdf
3.11 It is interesting to note that, when age allowances
were introduced in 1975/76, as a replacement for age
exemption9, they were in themselves a
simplification measure, the Chancellor, Denis Healey saying:
Box 3.B:
"I believe all Members of the House on both sides will
know how much this concession will be welcomed by elderly
people, who find the present system complicated and
confusing."10
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9As noted Annex A which gives some historical
background
10http://hansard.millbanksystems.com/commons/1974/nov/12/personal-taxation
3.12 Furthermore, their predecessor, age exemption, appears
to have been introduced to reflect potentially higher costs of living
of older people. Yet at the same time, it was acknowledged that
younger people “have their responsibilities too" and it
was therefore necessary to “hold a fair balance between the
young and old".
3.13 Older people can struggle to meet living costs. They
are often on a fixed income once they have retired, or perhaps on a
declining income in real terms where flat annuities have been
purchased to maximise income on retirement.
3.14 In reviewing age-related allowances, it is therefore
arguable that we should consider whether the balance struck in the
policy of years gone by remains valid today. A further consideration
is whether the tax system is the right place to compensate, by proxy,
for those costs faced by pensioners and whether that compensation is
reaching its target audience.
3.15 It is interesting to note that living costs do not
necessarily remain stable during retirement. Much depends on the
health and situation of the pensioner, care needs, whether they are
single, married, within a civil partnership, or other stable
relationship. For example, the Pensions Policy Institute published a
report in 2009 in which they noted:
Box 3.C:
“Pensioner spending can drop off as people become
older and less mobile, after the age of 75, and then increase
again in older age as people acquire health problems and need
to spend more on housing, fuel, power and food. However as
people reach age 95 and beyond, total spend tends to decrease
as spending on items such as clothing, leisure and transport
tends to drop off
dramatically.”11
|
11Pensions Policy Institute report: Retirement
income and assets: do pensioners have sufficient income to meet
their needs?
https://www.pensionspolicyinstitute.org.uk/uploadeddocuments/2009/PPI_Retirement_Income_and_Assets_28_April_2009.pdf
3.16 The question is: should the tax system attempt to
acknowledge these changing costs?
3.17 There have been many suggested answers to that
question over the course of our discussions in the initial stages of
the review. As noted, none of these are formulated into
recommendations at this stage. We list them here as points for
consideration but we will go on to recommend later in the report that
this is an area which requires further focus in the second stage of
our review. Some of the ideas have cost implications for the
Exchequer, or for claimants of the existing allowances, and so would
need careful consideration.
3.18 Some of the suggestions are administrative, others
would require policy decisions. An eventual recommendation from the
OTS could comprise a combination of these suggestions, or others
which have yet to be proposed or considered.
3.19 Taking into account the evidence we have obtained and
from our research, possible reforms to age-related allowances are
listed below:
- consider abolition of all age-related personal allowances,
probably by allowing them to 'wither on the vine' as the
main personal allowance is increased;
- gradually remove age-related allowances – for example by
restricting entitlement to them to those born before a certain
date, as has happened with the married couple's allowance;
- give the higher age allowance to all by reference to age and
regardless of income level (i.e. abolish the current taper) up to
the income level where personal allowances are withdrawn
generally.
- if the age allowance is to be withdrawn from those with higher
incomes, do not taper it away. Instead, set a higher income
threshold (perhaps aligned with the higher rate threshold for
administrative ease) at which point the higher allowance is removed
all at once, rather than a gradual taper. However, this has obvious
marginal rate or 'cliff edge' consequences;
- when tapering the allowance, introduce a disregard for a
certain amount of savings income so that HMRC can calculate the
restriction on the allowance via automatic
'P80012' end of year reconciliations,
thus taking many pensioners out of self assessment. The tax cost of
so doing, depending on the level of disregard, might be
counteracted by administrative savings as a result of processing
fewer self assessment tax returns. The level of such a disregard
could be considered in the context of other levels which HMRC uses
to decide whether or not a self assessment return should be
issued;13
- consider whether there is merit in giving age-related
allowances as a tax reduction instead of an allowance against
income. This reduction could be given to all pensioners over a
certain age regardless of income level, but only at a fixed rate,
for example at the basic rate (currently 20%). Such an approach
could even extend to negative tax – a credit – for
non-taxpayers, possibly integrated with other benefits;
- simplify the basis on which the allowances are tapered. For
example, the meaning of 'adjusted net income' for the
purposes of assessing whether income is over the abatement
threshold could be simplified;
- round all allowances to the nearest f50 or f100. For example,
for the 2011/12 tax year, f9,950 and f10,100 would have been
clearer figures than f9,940 and f10,090 for those aged respectively
65 to 74, and 75 and over;
- for those pensioners not in self assessment or making repayment
claims on form R40, give the higher age allowance automatically in
the year of becoming eligible for it, without the taxpayer having
to make a claim, thus preventing under-claimed allowances. This
would require a change in the law, as it currently states that the
allowances must be claimed. It could also lead to underpayments in
some cases and would need careful thought. The OTS acknowledges
that HMRC is changing the way in which age-related allowances are
claimed, by replacing the form P161 with a shortened claim form and
allowing claims by a new email channel (see section J of this
Chapter);
- have just a single age allowance for those aged 65 and over,
i.e. remove the differential between age 65 to 74 and those over
75. For instance, the allowances in the 2011/12 tax year are f9,940
for those aged 65 to 74 and f10,090 for those aged 75 and over. The
additional tax saving for those aged 75 and over at 20% is just f30
a year (under f0.58 a week);
- consider the age at which the age-related allowance is given:
the entry point could be aligned with the state pension age after
the equalisation of the women's state pension age with that of
men, and the subsequent increase for both men and women; and
- review the age-related personal allowances and married
couple's allowance together and consider making the age-related
allowances transferable also between spouses and civil partners. At
present, there is confusion for pensioners who try to equalise
their income, for example by moving savings to the partner with the
lower income. This arguably creates unfairness for those who cannot
transfer assets to each other, i.e. those whose income is mainly
comprised of pensions. Equally, however, introducing transferable
personal allowances could create new, albeit different,
complexities and may be expensive to the Exchequer and give rise to
potential administrative burdens for both pensioners and HMRC.
12See Annex C for a list of HMRC forms which
pensioners may have to use
13SAM100050 - http://www.hmrc.gov.uk/manuals/sammanual/sam100050.htm
3.20 In all the above we would need to have regard to the
possible impact on pension credit entitlement.
B. Married couple’s allowance
The married couple's allowance
is currently set as follows14: |
2011/12 |
Value at
10% |
2012/13 |
Value at 10%
|
|
£ |
£ |
£ |
£ |
Minimum allowance, if full
restriction applies |
2,800.00 |
£280.00 |
2,960.00 |
296.00 |
Full allowance
|
7,295.00 |
£729.50 |
7,705.00 |
770.50 |
14http://www.hmrc.gov.uk/rates/it.htm
3.21 The married couple's allowance is now available
only to married and civil partner couples in which one partner was
born before 6 April 1935. It is still possible to claim the allowance
where qualifying couples marry or register a new civil partnership.
Nevertheless, it is inevitable that the number of couples eligible
for, and claiming, the allowance will dwindle over time. HMRC's
latest available data, for the 2007/08 tax year, suggests that some
1.19 million couples claimed the married couple's allowance in
that year. The OTS appreciates that this information is slightly out
of date and consequently the numbers claiming the allowance currently
is likely to have decreased.
3.22 Up to and including the 2008/09 tax year, two
different rates of married couple's allowance could be claimed
– one for those aged up to 74 and another for those aged 75 and
over (based upon the age of the elder spouse or civil partner).
However, since 2009/10, all claimants of married couple's
allowance must be in the higher bracket, because one of the couple
must have been born before 6 April 1935 in order to be entitled to
it. They would therefore have reached age 75 in the 2009/10 tax year
and so qualify for the higher rate.
3.23 Oddly, however, the law still provides for a lower
rate of married couple's allowance of £7,185 (for 2011/12)
for 'any other case' than where a man or his
wife15, or an individual or their spouse or civil
partner16, was aged 75 or over in the tax year. As
this is now no longer possible, the law could be amended to give an
immediate simplification.
15Section 45(3)(b) Income Tax Act 2007
16Section 46(3)(b) Income Tax Act 2007
3.24 The married couple's allowance could of course be
considered entirely separately to agerelated allowance, but
there have been suggestions that the allowances should be considered
together.
3.25 On a more detailed level, in the year of marriage or
civil partnership registration, the married couple's allowance is
only given for those tax months in which the couple's
relationship was made official. By contrast, when a taxpayer reaches
age 65 or 75, they receive the higher age-related personal allowance
for the whole tax year, regardless of when in the tax year their
birthday falls.
3.26 The OTS has not been able to establish how many new
claims to married couple's allowance are made each year for new
marriages and civil partnerships. However, we were given an example
by Tax Help for Older People in Scotland of where an older couple,
widow and widower, had remarried at the ages of 75 and 77
respectively but had not realised they were eligible for the married
couple's allowance. By the time they found help to claim the
allowance, they were 85 and 87, and had lost the benefit of the
earlier tax years altogether, as they were out of time to claim.
3.27 The married couple's allowance also operates
differently from age-related personal allowances, in two ways:
- it is given at a 10% rate
- it is given as a reduction of the claimant's tax liability
rather than as a deduction from income.
These mechanisms for giving relief makes the allowance almost
impossible to explain in layman's terms, and causes substantial
confusion when showing the allowance on PAYE codes (both for
claimants and HMRC staff).
3.28 There are other peculiarities within the rules. For
instance, new rules were introduced from 5 December 2005 in order to
recognise civil partnerships as well as married couples for the
purposes of the allowance. From this, there remains a divide
depending on whether a marriage took place before or from that date
as to which of the couple the allowance is first allocated (i.e. for
those married before 5 December 2005, it is the husband to whom it is
allocated; but for marriages on or after 5 December 2005, it is
allocated to the spouse with the higher income). Couples married
before 5 December 2005 can elect for the later regime to apply which
affects the tapering of the allowance.
3.29 The married couple's allowance, like the blind
person's allowance (which we discuss in section D of this Chapter
below) is transferable between spouses and civil partners. The
minimum allowance, assuming full tapering has been applied, may be
transferred in full or shared between the couple if an election is
made to do so before the beginning of the relevant tax year. The rest
of the allowance is allocated to the husband (in the case of pre-5
December 2005 marriages) or to the higher-earning partner (in the
case of marriages or civil partnerships from 5 December 2005, or
other couples who have elected for the newer rules to apply).
However, if there is any unused surplus from the husband or
higher-earning partner, the balance may be transferred to the wife or
other partner.
3.30 HMRC data provided to the OTS suggests that some
40,000 couples transfer married couple's allowance between
them.
3.31 In the year of death of a spouse or civil partner, the
full allowance for the year remains due (i.e., there is no
proportionate reduction, as there is in the year of marriage or civil
partnership registration), but quite often the deceased's tax
liability cannot absorb the full married couple's allowance and
there is a balance to be transferred to the survivor. This surplus is
currently thought to go unclaimed in many cases.
3.32 However, it is hoped that improvements to HMRC's
form R2717, a new version of which the OTS
understands should be launched from April 2012, will go some way to
addressing this problem.
17See forms Annex C; and section L of this
Chapter below
3.33 As with age-related allowances, the OTS has not yet
formulated any recommendations in relation to the married
couple's allowance, except to the extent that it is a priority
area for further review in our second stage report. However, again we
list some of the possibilities for review and reform:
- consider the policy rationale of retaining the married
couple's allowance;
- consider giving it as an allowance against income in the same
way as the personal allowance or blind person's allowance,
which would remove the complications of the relief being restricted
to 10% and minimise the differences with other personal allowances.
The amount of the allowance would need to be considered in the
context of cost to the Exchequer;
- halve the allowance and give relief on it at 20%, thus removing
the confusion of the 10% rate. This would also reflect the way the
allowance is already shown on many PAYE Coding Notices (form P2),
i.e. in order to give the correct 10% tax relief, half of the
married couple's allowance is added to the taxpayer's
personal allowance on their form P2;
- do not taper the allowance. Instead, set a higher income
threshold (perhaps aligned with the higher rate threshold for
administrative ease) at which point the higher allowance is removed
all at once. But, as with age allowances, this has obvious marginal
rate or 'cliff edge' consequences;
- when tapering the allowance, introduce a disregard for a
certain amount of savings income so that HMRC can calculate the
restriction on the allowance via an automatic 'P800' end of
year reconciliations, thus taking many pensioners out of self
assessment. The tax cost of so doing, depending on the level of
disregard, might be counteracted by administrative savings as a
result of processing fewer self assessment tax returns;
- simplify the basis on which the allowances are tapered. For
example, the meaning of 'adjusted net income' for the
purposes of assessing whether income is over the abatement
threshold could be simplified;
- clarify the way it is shown and explained on taxpayers'
PAYE coding notices. Although the OTS understands that HMRC has
been addressing some problems where taxpayers were being given the
full allowance in their codes, not restricted to take account of
the relief only being due at 10%, it will be important to check the
2012/13 coding notice run to ensure this problem has been resolved.
We would therefore anticipate keeping this under review in the
second stage of the pensioner review. In any event, the mechanics
and explanations of how the allowance is shown should still be
reviewed;
- consider replacing the married couple's allowance with
increased age-related personal allowances (and consider making them
transferable). Although the OTS appreciates that there are
significant revenue implications, in terms of overall cost to the
Exchequer, the next stage of our review could consider this in more
detail. For example, those claiming pension credit might be
entitled to less benefit if their overall net-of-tax income (on
which their benefit claim is based) is increased as a result of tax
reform, which could have some balancing effect;
- review how the differences in marriages pre/post 5 December
2005, and election for new rules to apply, could be simplified. In
particular, should the post-2005 rules apply to all;
- review and aim to simplify HMRC form 18 and form 575 which
respectively relate to transferring the married couple's
allowance and transferring surplus allowances between spouses and
civil partners; and
- abolish the apportionment of the relief in the tax year of
marriage or registration of civil partnership, which seems to be an
unnecessary complication and would give a straightforward
simplification of the rules. Of course, it would be helpful to know
how many claims there are each year to calculate an approximate
cost of so doing. There is, however, a concern that if there are
only a few new claimants each year (see box below), the cost of
changing the rules and HMRC's systems as a result could be
disproportionate to the simplification achieved, if this measure
went through in isolation.
Box 3.D: Data on marriages and civil partnership
registration
The OTS has looked for data on the number of
marriages and new civil partnerships registered by those
potentially eligible for the married couple's
allowance.
Civil partnerships: The data we have found shows that,
across the UK there were 325 new partnerships registered in
the age 65 and over group in 201018. We
have not found data for those born before 6 April 1935.
Marriages: In 2008, 1,148 men and 436 women over the age
of 75 were married in England and Wales19.
We have only been able to locate data for
Scotland20 and Northern
Ireland21 for marriages in the age 55 and
over range, which is not representative of those who could
claim married couple's allowance.
|
18Office for National Statistics, Civil
Partnership Formations 2010: Table 4 Civil Partners (numbers): by
year, age group, country of formation and sex
http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm:77-224152
19Office for National Statistics, Age at
marriage and previous marital status, final 2008 figures: Tables 3a
and 3b
http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm:77-210946
20General Register Office for Scotland, Vital
events reference tables 2009: Table 7.1, Marriages, by sex and age,
Scotland, 1946 to 2009
http://www.gro-scotland.gov.uk/statistics/theme/vital-events/general/ref-tables/2009/marriages.html
(in 2009, 1,873 men and 1,075 women aged 55 and over were married
in Scotland)
21Northern Ireland Statistics and Research
Agency, Marriages by sex and age, 1948 to 2010, Table 7.1
http://www.nisra.gov.uk/demography/default.asp11.htm
(in 2010, 328 men and 184 women aged 55 and over were married in
Northern Ireland)
C. Sundry reliefs
C.1 Qualifying maintenance payments to ex-spouses
3.34 In a similar vein to the married couple's
allowance, there is a residual income tax allowance available to
those born before 6 April 1935 who are making maintenance payments to
a former spouse.
3.35 Those who qualify for the relief are entitled to a tax
reduction of 10% of the amount of the payments or, if less, the
equivalent of the minimum married couple's allowance (that is,
£2,440 @ 10% for the 2011/12 tax year, i.e.
£244)22.
22Part 8, Chapter 5 Income Tax Act 2007
3.36 The OTS understands that some
6,90023 taxpayers were still claiming this relief
in 2007/08, of whom 3,20024 complete self
assessment tax returns. It is presumed that the rest claim it year on
year through their PAYE coding. In the same way as the married
couple's allowance, the number of claimants is likely to diminish
over time with the latest birth date for claiming it fixed at 6 April
1935 and indeed as the latest data available at present is for
2007/08, the numbers may already be lower than shown above.
23HMRC data
24HMRC data
3.37 Although the number of claimants is minimal and likely
to diminish, our review has not identified any particular complexity
with the relief itself or its claimants. There might therefore be
little perceived simplification if it were abolished.
3.38 However, given its link to the married couple's
allowance and origins in an earlier system of tax relief for
maintenance payments, it nonetheless may warrant further review in
the context of a wider married couple's allowance review. The
OTS's review of the married couple's allowance as part of the
second stage of the pensioners' review will therefore have regard
to this linked relief.
C.2 Relief for interest to acquire an equity release annuity
3.39 There is a further obscure relief for interest on a
loan taken out to purchase a life annuity (an equity
release)25. In 1999 the relief was spared from the
general cull of MIRAS relief, and this section remained for loans
taken out before 6 April 1999.
25Section 365 ICTA 1988 (not rewritten as part
of the Tax Law Rewrite project)
3.40 In 1999, it was estimated that there were 10,000
borrowers eligible26, who had to be 65 or over at
the time the loan was made. Therefore, the youngest of those eligible
must now be some 78 years old and the number remaining eligible for
the relief is likely to be low.
26Explanatory notes to Finance Bill 2009,
clause 36 as introduced,
http://archive.treasury.gov.uk/financebill/1999/c36.html
3.41 Removing this relief would in turn enable removal of
all of the remaining MIRAS legislation still in ICTA 1988. This is
arguably a significant simplification.
3.42 The abolition of life assurance premium relief (LAPR),
now included in Finance Bill 201227 following a
recommendation by the OTS is a useful precedent for how to manage
such an exercise. As with LAPR, the impact of withdrawal of this
relief will need to be considered carefully, together with
appropriate compensation methods.
27See HM Treasury Consultation on draft
legislation for Finance Bill 2012,
http://www.hm-treasury.gov.uk/d/ots_life_assurance.pdf
D. Blind person’s allowance
3.43 The blind person's allowance (BPA) is an
additional allowance for individuals who are certified blind or
severely sight impaired (the rules varying depending on where in the
UK the taxpayer lives). The OTS review of tax
reliefs28 considered the allowance in some detail,
saying that the relief was 'not used by the majority of blind
people as they do not earn sufficient income and there may be better
ways to assist those with a visual handicap'. There was also
regular evidence that some of those able to use the relief do not
claim it, and lack of appreciation of transfer possibilities.
28http://www.hm-treasury.gov.uk/d/ots_review_tax_reliefs_final_report.pdf
3.44 We thought that the relief should be abolished and the
relief potentially available given in more direct ways to those
potentially eligible. However, we recommended 'not abolishing
this relief until an alternative and equivalent funding route is put
in place'. Annex E of the final tax reliefs report set out our
thinking on this relief in full.
3.45 This allowance was again brought up by many to whom we
spoke in the informationgathering stages of the pensioner tax
review.
3.46 This is because the incidence of blindness increases
with age, as noted in Annex E of our reliefs review:
Box 3.E: Extract from OTS review of tax reliefs - blind
person’s allowance
"E.8 The major reason for this is that most
blind people have insufficient income to claim the allowance,
but other potential reasons include:
We understand that up to 40,000 people each year become blind
or severely sight impaired ("SSI"). A further
reason for the low take up is that for many of these people
it occurs later in life and therefore the BPA is not known
about, and tax is low down the list of priorities when an
individual is coming to terms with being blind;
Most of these individuals are over 75 and, as they may also
have other disabilities, they may receive certain other
benefits. Few of these individuals are likely to have
sufficient taxable income to utilise BPA;
..."
|
3.47 The different qualification criteria for the allowance
according to where in the UK the taxpayer is resident contribute to
its complexity, with the rules for Scotland and Northern Ireland
being different from those in England and Wales.
3.48 When talking to pensioner advisers in Scotland, the
illogicality of the criteria for claiming BPA for taxpayers living
there was raised. Given that the vast majority of people with
eyesight impairment in Scotland are thought to be over the age of
6029, why link the allowance to the
individual's capability 'to do any work for which
eyesight is essential'30? The same rules apply
in Northern Ireland.
29See, for example, the DeafBlind Scotland
website which quotes "Most deafblind people are over 60 years
of age and have become dual sensory impaired as part of the ageing
process."
http://www.deafblindscotland.org.uk/index.php?option=com_content&view=article&id=67:fast-facts&catid=39:deafblindness&Itemid=55
30Section 38 Income Tax Act 2007
3.49 This definition could, in itself, deter those with
degenerating eyesight in older age from claiming the relief, as the
wording of the law could be misinterpreted to the effect that to be
entitled one has to be of working age.
3.50 We appreciate that our earlier recommendations on the
BPA were not taken forward. However, given the strong link between
sight impairment and older age and the views we have gathered from
pensioner advisers, we believe that we would be failing in our brief
to identify complexity if we did not raise the matter again in this
review. In short, we have to reiterate our earlier conclusion and
recommendation, that the available funds for the relief would be
better utilised by direct grant rather than the poorly-used tax
relief.
E. Savings taxation
E1 The 10% savings rate
3.51 Another repeated theme in our pensioner review has
been the complexity of the 10% savings rate31,
introduced with effect from 2008/0932 after the
abolition of the starting rate of tax at 10%.
31Section 7 Income Tax Act 2007
32Section 5 and Schedule 1(2) Finance Act
2008, effective from 2008/09 and subsequent tax years
3.52 The 10% starting rate for savings does not cause
complexity for pensioners alone, as it can be claimed by taxpayers of
any age provided they meet the qualifying criteria. Given, however,
that older people who have retired are often on incomes low enough to
claim the rate, and might have some savings, pensioners are more
likely to be eligible for it than other segments of the
population.
3.53 The general view is that this rate is not applied to
all taxpayers who should qualify for it. This is because the taxpayer
either has to be in self assessment or submit an R40 repayment claim
in order to get the benefit of it. Due to people's lack of
awareness of the rate and the intricacies of working out whether or
not it applies, many therefore do not understand they can make a
repayment claim for the 10% of the 20% tax that was deducted on their
savings income but which falls in this band. HMRC data suggests that
there are some 387,000 'pensioners' (using the OTS definition
of people aged 60 or over who are in receipt of any form of pension)
in contact with HMRC who are benefiting to some extent from the 10%
savings rate. Those pensioners are either in self assessment or know
that they can claim for repayment of tax.
3.54 One complication of the relief is that the savings
rate band is notionally absorbed by other income over and above the
personal allowance. Therefore, to the extent that a pensioner's
cumulative pension (or, say, rental) income exceeds his or her
personal allowance, the benefit of the 10% rate against savings
income is lost.
3.55 For 2011/12, the starting rate band of 10% applies to
savings income up to £2,560 over the personal allowance.
Box 3.F: Example:
Frieda, aged 67, has pension income of
£12,250 a year. She has taxable interest on savings of
£1,000 gross, on which £200 tax is deducted at
source. Her entitlement to the savings rate band (potentially
£2,560) is reduced to £250 by virtue of the
£2,310 excess of her pension income over her personal
allowance of £9,940. Therefore, she can claim a tax
repayment of £25 as a result of the 10% savings
rate.
|
3.56 In considering the case for removal of this complex
'relief', the OTS will need to do further work. It will be
necessary to consider the numbers affected by any proposals and
whether there would be a mechanism for compensating them. Such
compensation could, for example, take into account that there could
be administrative cost savings as a result of fewer repayment claims
(R40) being made. It is clearly possible that any such compensation
would be indirect, i.e. not precisely targeted at those who lose out;
but that is a policy matter and beyond the remit of the OTS.
E2 Registering for interest paid gross on bank and building
society deposits
3.57 Form R85 is used by non-taxpayers to register to
receive gross interest on bank and building society deposits. This is
currently, however, an 'all or nothing' arrangement in that a
person can only register for gross interest if they believe they will
be a non-taxpayer for the year based upon their total anticipated
income including the interest.
3.58 Many pensioners have two or more savings accounts. It
has been suggested that there would be a cashflow benefit for
pensioners, as well as a possible reduction in R40 repayment claims
submitted to HMRC, if this policy were to be relaxed so that
taxpayers could register for gross interest on some accounts but not
others. This could allow them to obtain the benefit of their personal
allowance without having to file an interim R40.
Box 3.G: Example
Hannah, aged 71, has pension income of
£8,500. She has interest of £1,000 from Bank A and
of £1,200 from Bank B. Her 2011/12 personal allowance is
£9,940. Because her total income is greater than her
allowance, she cannot use Form R85 to get gross payment, even
though her pension plus interest from Bank A is less than her
allowance. If she could choose to complete an R85 for Bank A
but not for Bank B, the amount of tax deducted only on
interest from Bank B would be much closer to her actual
liability to tax.
|
3.59 Furthermore, if the taxpayer is in self assessment
because they are "in receipt of savings or investment income
(from which tax has been deducted) of £10,000 or more (before
tax)”33 they have to have tax deducted on all
of their savings interest in-year, and wait to reclaim it after the
end of the tax year. The law prohibits them from making a provisional
tax reclaim in-year, for example by filing an interim
R4034.
33SAM100050 - http://www.hmrc.gov.uk/manuals/sammanual/sam100050.htm
34Section 42(2) of the Taxes Management Act
1970 (TMA) requires that "... where notice has been given
under section 8, 8A or 12AA of this Act, a claim shall not at any
time be made otherwise than by being included in a return under
that section if it could, at that or any subsequent time, be made
by being so included”. However, interim refunds of PAYE are
permitted by virtue of the exclusion from this rule set out in
Section 42(3) TMA (for example by filing form P50 where employment
ceases – see forms Annex C, or form P53 where too much tax
has been deducted on taking a lump sum from a small pension,
otherwise known as 'trivial commutation' – see
section H of this chapter.
3.60 This can be a particular problem for pensioners who
are reliant on savings to supplement pension income.
3.61 In considering this issue further in the second stage
of our review, we will aim to investigate the numbers of pensioners
adversely affected by the current situation and would welcome any
suggestions as to how an alternative system could be put in place
which makes life easier for taxpayers but minimises risk to the
Exchequer.
E.3 Form R85 following a bereavement
3.62 R85s might no longer apply when a pensioner loses a
spouse or civil partner. The survivor may have been a non-taxpayer
prior to their loss but, due to inheriting pension income and other
assets from the deceased, their position may change.
3.63 If R85s are not withdrawn at that point, an
underpayment of tax can arise.
3.64 However, to date there has been no trigger to warn the
survivor of this issue. Government information available in the form
of Department for Work and Pensions' (DWP) booklet
DWP102735 does not provide any information.
However, the OTS has noted that the notes accompanying the new style
form R27, planned for introduction from April 2012, do include a
section on reviewing R85s for the surviving spouse. This is a welcome
development.
E.4 Repayment claims
3.65 The repayment claim form R40 (for tax overpaid on
savings income) is currently available on paper only. Representations
have been made to the OTS that it would be administratively simpler
for many pensioners and advisers, as well as for HMRC, if the form
could be filed online. Of course, we are not suggesting that the form
should only be available online: as we discuss in section N,
pensioners, more than any other group of taxpayers, need continuing
access to paper as well as other methods.
35Last revised January 2009 - http://www.dwp.gov.uk/docs/dwp1027.pdf
3.66 We understand from HMRC that concerns around possible
frauds delayed the introduction of an online R40 but that HMRC is
currently developing an online version of this form. This report
endorses the benefit of that work and we hope that it will lead to
online availability in the near future.
E.5 Dividends on overseas shareholdings
3.67 The OTS has noted that there are complications if
pensioners hold shares in foreign companies. For instance, many might
have held accounts with previous mutual societies which have now been
subject to take over from abroad, e.g. Abbey National, taken over by
Banco Santander.
3.68 HMRC has introduced some simplification for self
assessment taxpayers in that foreign dividend income of up to
£300 can now be reported on the main return, rather than
completing the foreign pages. But if income increases above that
level so that the foreign pages must be completed, the OTS has heard
that pensioners struggle to understand HMRC's accompanying
guidance notes. Moreover, the treatment of up to £300 of foreign
dividends as UK dividends does not extend to the criteria for
requiring a self assessment return to be filed: any amount of foreign
income puts a person into self assessment36.
36See http://www.hmrc.gov.uk/sa/need-tax-return.htm
which says: “You must complete a tax return if you have any
foreign income that's liable to UK tax”.
3.69 This is, however, not an issue exclusive to pensioners
and has not been a subject of primary investigation in preparation of
this interim report. Nevertheless, we suspect that it is a bigger
issue for pensioners than for younger taxpayers given that the
demutualisation of the majority of societies like Abbey National and
others occurred in the late 1980s and early 1990s and that those
benefiting from demutualisation were perhaps likely to be older
savers at the time. We would therefore not rule out further
investigation of this point.
E.6 Purchased life annuities
3.70 A purchased life annuity is the exchange of a capital
sum for a regular income. For tax purposes, part of the receipt is
treated as a return of capital and part is taxable income (taxed in
the same way as savings interest).
3.71 In the early stages of preparing this interim report,
it was suggested to the OTS that there is some confusion between the
tax treatment of this type of annuity and ordinary pensions.
3.72 At this stage, the OTS has not obtained any particular
evidence of those complexities, nor were these type of annuities
raised in many instances during the meetings we held around the UK.
We deduce that information provided by the annuity providers suffices
to help annuitants. However, it may well be that there is scope for
the initial notifications to annuitants to spell out more clearly
what will happen to the annuity as regards tax.
E.7 Interest information from deposit-takers
3.73 Both agents and taxpayers have told the OTS that it
can be difficult to obtain accurate interest details from banks and
building societies for inclusion on tax returns, to prepare repayment
claims or to check P800 tax calculations from HMRC.
3.74 It is perceived that this is an increasing problem
with fewer banks and building societies issuing end of year tax
certificates as a matter of course.
3.75 Agents waste time (and costs) on taxpayers' behalf
trying to reconcile details and unrepresented taxpayers may make
errors in manually totalling interest figures and may forget some
accounts.
3.76 The suggestion has been put to the OTS that it should
be compulsory for deposit-takers to send all account holders
certificates of interest and tax deducted each tax
year37.
37Section 975(2) Income Tax Act 2007 says
“(2) If the recipient requests it in writing, the
person must provide the recipient with a statement showing —
[details of interest and tax]”. This contrasts with the
position for gains on life assurance policies where the insurer is
obliged to send the information – s 552(1)(a) ICTA 1988.
3.77 The OTS notes, however, that our review has not
included discussions with deposit-takers, so further work on this
aspect would be needed prior to formulating recommendations.
F. The state retirement pension and its interaction with certain
other benefits
F.1 Fundamental points – the origins of complexity and
considering whether the state pension should be taxable at all
3.78 Taxation of the state pension was a common theme
amongst those consulted. The historical background to the taxation of
the state pension is summarised in Annex A.
3.79 There are many misconceptions amongst the pensioner
population over how taxation of the state pension currently works.
The key point is probably that many people do not understand that it
is taxable at all38. Furthermore, many of those who
do understand that it is taxable feel that this is unjust, given that
they have contributed through the national insurance system
throughout their working life.
38See Annex D to this report. HMRC data
submitted to the OTS quotes from the DWP's Attitudes to
Pensions: The 2009 Survey, thus: '37% of respondents were not
aware of any rules about pensions and tax' and 'less than
half (41%) were aware that Pension Income is subject to tax like
regular income'.
3.80 This misunderstanding is compounded by the fact that
the state pension is paid by the DWP without PAYE applying. This
leads to many coding problems. We explore this aspect further
below.
3.81 There is some feeling that because there is no tax
relief on national insurance contributions (NICs) which count towards
eventual entitlement to the state pension, the state pension should
not be taxed when it is paid out. Contrasting this to private pension
savings, where tax relief is generally available on pension
contributions and part of the eventual fund can be withdrawn
tax-free, the confusion is perhaps understandable. We acknowledge
that pension contributions are not deductible for national insurance
contributions purposes but the symmetry is maintained with no
national insurance contributions on pensions.
3.82 For many pensioners, the reason for distinction
between different Government departments is unclear. Whether it is
HMRC or DWP they are dealing with, their perception is usually that
it is 'all government' and so they should be able to
communicate through a single entry point. It can therefore come as a
surprise that HMRC does not necessarily have all the same information
about the taxpayer that is held by the DWP. Moreover, the distinction
between local and central Government can be unclear as is what data
is shared (or not, as the case may be) between the two. This may be a
factor for those pensioners claiming council tax benefit and help
with housing costs, for example.
3.83 Whilst a single entry point into Government to deal
with tax and benefits matters together might be difficult to achieve,
more coordinated working and guidance between different departments
would be a step forward. Longer term, with the Government consulting
on modernising the personal tax system for individuals and improving
transparency, there are opportunities to explore greater links
between HMRC and DWP systems. Moreover, pre-filling of data from the
DWP onto HMRC tax forms and pre-population of Real Time Information
(RTI) data on the DWP's systems for the purposes of benefit
calculations (as envisaged for Universal Credit) is likely to result
in taxpayers having a greater perception of Government as a single
entity rather than separate departments with different
responsibilities.
3.84 It is therefore essential to address at an early stage
how these developments are to be communicated – both for the
benefit of today's pensioners and those of the future – and
what their responsibilities are in terms of checking that everything
is working as it should be.
3.85 The dividing lines between different parts of
Government can cause problems for those receiving other state
benefits, particularly those which might be paid with the state
pension.
3.86 Some benefits are not taxable – for example:
attendance allowance, pension credit, winter fuel payments, the
Christmas bonus and cold weather payments. Yet pensioners often do
not understand the distinction and might therefore mistakenly include
them with their state pension when filling in a self assessment tax
return, or struggle to reconcile the figure on their PAYE coding
notice or PAYE annual reconciliation calculation.
3.87 The possible solutions to the problems are manifold.
None of the options below should be taken as recommendations of the
OTS at this stage, but for completeness the discussions have
included:
- leave the system as it is but explain it better to taxpayers
(this applies to both HMRC and DWP);
- improve the communications between HMRC and DWP; exempt the
state pension from tax altogether;
- get the DWP to operate PAYE on the state pension (universally,
or in cases where total state pension exceeds the personal
allowances);
- issue a 'P60' equivalent form for the state pension at
the end of the tax year, clearly showing the amount of taxable
state pension and any other taxable benefit; and
- change the basis of taxation of the state pension from an
entitlement basis to a receipts basis, thereby overcoming problems
of working out the amount of state pension to be taxed, which can
be a particular problem in the first year of payment and when
payments are made four or 13 weeks.
3.88 Indeed, an eventual simplification strategy might
comprise a combination of one or more of the above or other
possibilities. These will be explored further in the second stage of
our review. The OTS acknowledges that issues affecting the DWP and
its administration of the state pension will need to be taken into
account.
F.2 Tax and a new state pension – the current system and
changes already in progress
3.89 We understand that HMRC and the DWP are working
together to improve the flow of information about the state pension
and thereby aim for prompt and accurate collection via PAYE coding of
the tax due on it, where possible.
3.90 The DWP currently informs HMRC of new state pensions
through a paper process. The DWP generates form P46DWP where it
accepts a claim to state pension and
- the customer provides a PAYE reference; or
- the amount of state pension in payment is more than £38 a
week.
3.91 The P46DWP includes the rate of state pension payable
and is sent to HMRC within three months (or less) of the pensioner
reaching their entitlement date. The form often includes an
'initial' award where a 'final' figure has not been
determined at the time of a claim being accepted. HMRC applies the
information to the pensioner's records on or after their
entitlement date. State pension is not included in tax codes before
the entitlement date is reached. Revised tax codes are issued at this
point.
3.92 Where HMRC decides that there is income tax liability
that can be met using PAYE, the P46DWP (slip) is detached from the
P46DWP form and sent to an internal capture group within HMRC. This
team captures the information from the slip onto an electronic file
which is emailed regularly back to DWP. The purpose of this is to
ensure that the DWP sends HMRC annual updates for these cases of the
revised amount of state pension payable from the following 6 April.
The annual updates normally take place in December or January.
3.93 As a result of a joint working initiative between HMRC
and the DWP, the OTS understands that HMRC plans to automate the
P46DWP process for state pension recipients from October 2012. The
project includes an electronic interface with the DWP on which state
pension information will be passed to HMRC for all new
recipients.
3.94 Information will be passed to HMRC on the state
pension entitlement date, by which time it is expected that a high
proportion will be confirmed final amounts. DWP will also send
amendments where payable amounts change, something that is not within
the current process (this can happen in particular on the death of a
spouse when the surviving spouse's pension may be increased). On
receipt of state pension payable amounts, HMRC will trigger automatic
tax code calculations. The proposed changes offer the benefit of
ensuring that tax codes include the latest, most accurate state
pension information.
3.95 However, there are strong views that this does not go
far enough to simplify the tax system for state pensioners.
3.96 There are also concerns that the interim solution
adopted between October 2011 and the launch of the fully automated
system from October 2012 could lead to some pensioners still paying
an incorrect amount of tax.
3.97 This interim solution is that HMRC will automatically
insert an amount of basic state pension into the PAYE tax code when
an individual reaches pension age. The aim was to reduce considerably
the number of pensioners who face unexpected large underpayments
after the end of year reconciliation. However, as HMRC will only be
inserting an estimated amount of state pension, a significant level
of inaccuracy will still remain.
3.98 Whilst the OTS understands the rationale for this
interim measure, concerns have been raised that there are
insufficient safeguards for those pensioners where an estimate is
used in their code, to ensure that the right tax is paid at the end
of the year. For example, those who have deferred taking their state
pension may nonetheless find their PAYE code has been restricted and,
if they do not understand or take appropriate action, they could
significantly overpay. It is therefore essential that HMRC undertakes
to review all records where a basic amount has been inserted in the
absence of a final figure, and to ensure that those cases are
reconciled after the year end. In so doing, HMRC must ensure that the
reconciliations use final and accurate state pension figures from the
DWP or contacts the pensioner if there is any doubt.
F3 PAYE and the state pension
3.99 Although the OTS is mindful that there would be costs
involved for Government if the DWP were to operate PAYE on state
pensions, this suggestion was made almost unanimously by those to
whom we talked in the information-gathering stage of our review.
Before any firm recommendation can be made on this point, there needs
to be a detailed review of the costs and benefits, including
HMRC's and the DWP's capacity to manage the transition to new
arrangements and to deal with enquiries.
3.100 The state pension is often the largest source of a
pensioner's income. Therefore if it were on a par with other
pensions taxed under PAYE, it would normally be the source to which a
pensioner's personal allowance is allocated.
3.101 It might not be necessary to operate PAYE on all
state pensions to achieve some simplification, but operating it on a
limited basis could reduce the number of pensioners within self
assessment. As a starting point, all state pensions would need to be
within the scope of PAYE, but many would naturally fall out of tax
with personal allowances exceeding pension income.
3.102 The cost implication of operating PAYE on the state
pension in certain cases might therefore be offset to some extent by
the reduced cost of administering self assessment for those same
pensioners. On its introduction, the new system would of course need
to be explained to pensioners. HMRC and DWP would need to develop
clear communications on the transition. This is the same with any
change, but the intention is of course to make pensioners' tax
easier to explain and deal with in the future which might mean
accepting an additional cost in the short term.
3.103 HMRC data for 2009/10 suggests there are some 47,000
pensioners with state pension as their only source of income who
currently have to file self assessment tax returns each year as there
is no other mechanism for collecting the tax due from them. This is
because the state pension is paid to them gross yet it exceeds the
personal allowance to which they are entitled. For some female
pensioners under the age of 65, this might be the basic personal
allowance; for others aged 65 or over, this would apply where the
state pension exceeds the age-related allowance. Some administrative
easement is provided for this group in that HMRC should supply them
with a short tax return (SA200)39.
39See SA200 Short tax return on HMRC website
(search2.hmrc.gov.uk/kb5/hmrc/forms/view.page?record=SCleiU-LYEs&formId=3238%23forms%20)
3.104 Whilst 47,000 out of the total pensioner population
is a small proportion, there are other state pensioners who are in
self assessment because the state pension is paid gross. Those who
have small amounts of private pension income which is not large
enough to enable their whole tax liability to be collected from it
under PAYE also have to complete annual tax returns. This can be
because of the overriding limit of 50% on the amount of income that
can be deducted from PAYE income when operating a K
code40.
40See Regulation 2(1) (Interpretation) of the
Income Tax Pay As You Earn Regulations 2003 (SI 2003/2682) for the
meaning of the overriding limit – being 50% of the payment
concerned - and regulation 23(5) for its application in the context
of K codes
Box 3.H: Example
Bill, aged 66, has state pension income of
£221.15 a week from April 2011. He also receives a
pension from his former employer of £25 a month. For the
2011/12 tax year, his total income is therefore £11,800.
He is entitled to an age-related personal allowance of
£9,940, so £1,860 of his income will be taxed at
20%, i.e. tax due of £372. A code of K155 will be
operated against his private pension, but the overriding
limit will be applied, so tax of just £150 will be
deducted under PAYE, leaving a balance of £222 to be
collected under self assessment.
Note in this example that even disapplying the K code
overriding limit of 50% and collecting 100% of the private
pension as tax would still leave a liability of £72 due
under self assessment.
How would Bill's position differ if PAYE were operated on
his state pension?
A PAYE code of 994P would operate against the state pension,
and a BR code against the private pension.
He would not have to fill in self assessment returns, as all
his income would be taxed at source. Furthermore, he would
not have to set aside funds to pay his tax liability on 31
January following the tax year, as he currently does under
self assessment.
|
3.105 By requiring the DWP to operate PAYE on the state
pension, there is potentially a further administrative saving for
pensioners on low incomes who are also claimants of state benefits.
Entitlement to pension credit is, for example, calculated on net of
tax income. This presents a problem for state pensioners who are in
self assessment, and in particular women in receipt of the state
pension but not yet entitled to the higher age-related income tax
allowances. The DWP default to calculating pension credit on the
gross state pension and claimants do not always realise that they are
able to adjust their income figure for the tax due under self
assessment. Making this adjustment is also potentially an
administrative complexity for the DWP.
3.106 If the state pension were paid net of tax from the
outset, this complexity would disappear. However, we do acknowledge
that there is an administrative burden to bring the state pension
into PAYE, the scale and full impacts of which need to be identified
through further work.
F4 Information from the DWP about the state pension
3.107 At present, state pensioners are notified by the DWP
of their state pension entitlement at various points:
- before it starts to be paid on a first claim;
- when the rate of payment changes; or
- just before the beginning of the new year (i.e., in the spring
before the new rates of pension begin in early April).
3.108 The only other information state pensioners receive
is from their bank statements which show the amount of benefit
credited, which may be the state pensions plus an amalgamation of
non-taxable benefits such as attendance allowance.
3.109 From this, it is often difficult for taxpayers and
their advisers to determine the correct amount of taxable state
pension to record on a tax return (or to separate out taxable state
pension from other non-taxable benefits), or to check the state
pension restriction in a P2 coding notice. Tax advisers in practice
report that taxpayers often send them the wrong year's state
pension figure with their tax return information. For example, many
clients send the letter confirming the rate of pension payable from
April 2012 with their 2011/12 tax return information, whereas the
adviser actually needs to know the figure from April 2011.
3.110 Moreover, pensioners in self assessment who are
unrepresented are likely to make errors41 when
completing their tax returns as a result of not having ready
information as to their taxable state benefits. This is potentially
costly for HMRC if those returns then have to be corrected, or indeed
could be very costly to the taxpayer if the error goes unnoticed and
they overpay tax as a result of returning non-taxable items with
their state pension. These problems are compounded if they go
undetected for a number of years.
41HMRC figures show that for 2009/10, they
made corrections of 25,267 main tax returns and 10,512 short tax
returns in respect of state pensions. The split of
represented/unrepresented taxpayers amongst these figures has not
been identified, and more information as to the type of errors
would be needed to draw any firm conclusions.
3.111 A reduction in this type of avoidable error could
save on administration for HMRC which would release resources to
direct towards other, arguably more productive, work.
3.112 A change in administration – the DWP providing
a 'P60 equivalent'42 at the end
of the tax year – is therefore perceived by many as an easy
step towards practical simplification. The feasibility of the DWP
providing this information and the associated costs would of course
need to be taken into account. These are factors which could be
explored in more detail in the second stage of our review.
42The ideal would be for this P60 equivalent
to list all payments by the DWP, making it clear which are taxable,
and which are not.
3.113 In bereavement cases, it has also been put forward
that DWP should automatically issue details to the administrators of
an estate of how much state pension was paid in the final tax year to
date of death, for the purposes of finalising the deceased's
affairs. Anecdotally, it often takes several attempts to obtain this
information.
F5 Raising awareness of how the state pension is taxed
3.114 Representations have been made to the OTS from those
consulted that there is insufficient or poor information given to
state pensioners about the tax status of their state pension and how
the tax on it will be collected, particularly for those claiming the
state pension for the first time.
3.115 In preparing this interim report, the OTS has been
advised that HMRC does not proactively send detailed information to
new state pensioners about how their state pension will be taxed.
Leaflet IR121 Approaching retirement, a guide to tax and national
insurance is available online43 (although HMRC
will provide hard copies of information on request). The DWP has
advised us that the award notice and statement of details advising
state pensioners of their new (or revised) entitlement to state
pension includes the following paragraph in relation to income
tax:
43http://www.hmrc.gov.uk/leaflets/ir121.pdf
Box 3.I: Extract from DWP information to new state
pensioners Income Tax
State pension is taxable. You should tell your Tax
Office about the amount of state pension you will get and the
date you will start receiving it from.
There is more information about this in leaflet Income tax
and pensioners. You can get this leaflet from any HM
Revenue & Customs office or Tax Enquiry Centre. Their
phone numbers and addresses are shown in the business numbers
section of the phone book. Look under HM Revenue &
Customs.
We will send you a statement once a year. Keep the statement,
as the details will help you if you have to fill in a tax
form.
|
3.116 However, it seems the DWP is still using an earlier
title for the HMRC leaflet IR121 which is now called Approaching
retirement, a guide to income tax and national insurance
contributions. HMRC has agreed that they will liaise with the DWP
to update this reference.
3.117 In any case we note that many new pensioners will not
have a 'tax office' if they have been dealt with via PAYE and
few will have access to a local office these days. It would be much
better to give a standard address to contact and also clear details
of how the pension will (or will not) be taxed.
3.118 We understand that the DWP also has two other
information leaflets relating to the state pension – the
BR3344 and the BR145. Although
these do make reference to the state pension being taxable, they do
not specify how tax will be collected on it.
44http://www.direct.gov.uk/prod_consum_dg/groups/dg_digitalassets/@dg/@en/@over50/documents/digitalasset/dg_180223.pdf
45http://www.direct.gov.uk/prod_consum_dg/groups/dg_digitalassets/@dg/@en/@over50/documents/digitalasset/dg_180391.pdf
3.119 Failure to make taxpayers aware of how the state
pension is taxed can lead to pensioners getting into debt and being
unable to pay when they eventually realise their liability. This
awareness perhaps arises only when a self assessment tax return is
issued and completed after the end of the tax year. Depending on when
the taxpayer claimed their state pension during the tax year, this
could be some considerable time later, particularly if the tax return
is not completed soon after it is issued.
3.120 This can lead to situations in which pensioners
ignore self assessment tax returns as they do not understand why they
would need to fill one in; or to them not having set aside funds to
pay the tax due under self assessment. In extremes, it could lead to
the tax being irrecoverable and has certainly led to a lot of
unexpected tax bills.
3.121 It is difficult enough for pensioners to adjust to
their post-retirement income levels without a later and unwelcome
surprise that there is tax to pay on their state pension. As above,
this strengthens the case for deducting tax from the state pension at
source; but at the very least, it is a clear case for ensuring that
HMRC or the DWP provide appropriate information to pensioners so that
they can make provision for the tax which is due under self
assessment if they are likely to be taxpayers. This is particularly
important as those affected are likely to be lowincome
pensioners, as in the example of 'Bill' at Box 3.H above.
3.122 When HMRC adjusts a PAYE code to include the state
pension, a note will be included on the P2 Notice of Tax Code, the
precise nature of which will vary according to the circumstances.
3.123 Other information is available online, including, as
noted, HMRC's leaflet IR121 for those approaching retirement. The
Directgov website includes information about how the state pension is
taxed46, the tax47 element of
which is replicated on the HMRC website48. The OTS
is not clear, however, how pensioners would know to look for that
information without any apparent prompt from HMRC to do so. It is one
thing to have information available, but whether it reaches its
target audience is quite another. We discuss this further under the
heading of 'Digital exclusion' within section N of this
Chapter.
46See
http://www.direct.gov.uk/en/pensionsandretirementplanning/statepension/index.htm
47'Tax on your state pension', see
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnBenefitsPensionsAndMaintenance/DG_172143
48See http://www.hmrc.gov.uk/pensioners/pension-statepension.htm
F6 Deferred state pensions
3.124 Thus far, the OTS has gathered little evidence of
complexity or problems in the context of how deferred state pensions
are taxed once the pension is eventually claimed – whether by
way of a lump sum, deferred for 12 months or more, or as an increased
pension.
3.125 However, deferred state pension lump sums are subject
to a separate tax regime49, in that the lump sum is
taxed only at the rate of tax that the pensioner otherwise pays on
his or her income of the year of receipt. This means that if they are
otherwise a non-taxpayer, no tax is paid on the lump sum; if they are
a basic rate taxpayer, basic rate tax is paid; and so on. But the
lump sum cannot move the pensioner into a higher income tax band, nor
does it count as income for the purposes of tapering age-related and
married couple's allowances, nor does it move capital gains into
the 28% band.
49In sections 7 to 10 Finance (No. 2) Act
2005
3.126 The DWP operates PAYE to a limited extent on these
state pension lump sums, either deducting no tax at all or a flat
rate of tax according to the pensioner's declaration of what
their tax position is on their other income. The taxpayer may also
claim their pension but defer the lump sum until after commencement
of the next tax year if it is more advantageous to do so for tax
purposes.
3.127 Confusion can arise if a pensioner takes both a
trivial commutation lump sum from a private pension (the taxable
element of which is taxed as 'normal' pension income, i.e. it
can change the taxpayer's final marginal rate – see section
H of this Chapter) and a state pension lump sum, only to encounter
different tax treatments.
3.128 Problems also arise in terms of the complexity of a
pensioner deciding whether or not to defer. Although tax is only one
element of that decision, it can play a significant role,
particularly in the context of when to take an eventual lump sum if
their income, and therefore tax rate, is likely to fall in future. As
part of the next stage of our review, further review of the
information available50 as to the tax consequences
for those considering deferral and exploring whether additional tools
or support would be helpful to pensioners facing this type of
decision may be a useful exercise.
50A 63 page booklet is available from the DWP
entitled 'State pension deferral – your guide' (last
updated April 2011). See
http://www.direct.gov.uk/prod_consum_dg/groups/dg_digitalassets/@dg/@en/@over50/documents/digitalasset/dg_200597.pdf
G. Welfare benefits, other than the state pension
3.129 We have already referred to the confusion which can
be caused as a result of some other state benefits being paid
alongside the state pension.
3.130 Although our review is limited to tax simplification,
with the pensioner tax review there are natural crossovers to welfare
benefits, not least because there is not always a clear dividing line
between working and retirement ages. Indeed, this line is likely to
become increasingly blurred over the coming years with changes to the
state pension age and people continuing to work for longer if they
remain fit to do so beyond traditional retirement age. This is
particularly so with the abolition of compulsory retirement ages.
3.131 As noted in the introduction section to this interim
report, there is no clear definition of the term 'pensioner'.
There are those who, for example, are forced to stop work early due
to illhealth or perhaps find themselves struggling to find work
and are reliant on state support after they have been made redundant
late in their working life.
3.132 Although we have not had the opportunity to review
the matter in detail for this interim report, this could be an area
in which simplification is necessary. As many benefits merge into
Universal Credit, a separate pension credit remains for older people,
and it is important to be clear about the tax status of benefits. For
benefits which are means-tested, it is also necessary to be clear how
income is defined and whether it is net of tax income, especially
where systems are being automated so that the DWP uses HMRC data to
calculate benefits entitlement. Where data collected for one purpose
is used for another, it is therefore essential to ensure that the
correct data is transmitted. In simplification terms, it would be
ideal if the same data (income measure) were to be used for all
purposes.
3.133 Descriptions of benefits can be confusing. For
example, people who have stopped work early due to ill health might
be receiving employment and support allowance (ESA), but there are
two types: income-based ESA is not taxable, whereas
contribution-based ESA is taxable. But they are both described as ESA
and usually the claimant will not know which type they are getting,
which makes it impossible for them to understand their tax situation.
It also causes problems for their (often voluntary sector) advisers,
who might have to contact the DWP to ascertain which type is being
paid.
3.134 It would be much simpler if all benefits were treated
the same way for tax purposes (probably non-taxable) and all
calculated on the same income basis (probably on gross, pre-tax
income). Such a pattern would have major policy implications as well
as requiring very significant system changes. As such the goal in
unlikely to be achieved quickly – though it is arguably one
that should be a target – the holding remedy is clearer
information and the introduction of a Form P60 for benefits as
discussed above.
H. Accessing funds in small pension pots
3.135 Another variation to the standard pension is
'trivial commutation' of small pension pots, i.e. the
exchange of accrued pensions for a lump sum, instead of taking a
regular income. This is allowed in limited circumstances, for those
who have succeeded in amassing only small private pension savings
throughout their working life.
3.136 The tax treatment of such lump sums is not subject to
the same 'simplified' regime as for deferred state pension
lump sums. Instead, 25% of the lump sum is tax-free and the other 75%
is taxable (taxed at source under PAYE by the pension provider) as
normal pension income, i.e. it can result in the pensioner being
taxed at higher rates than they otherwise would be.
3.137 While the OTS acknowledges that the Government has
consulted on Early Access to Pension Savings51 and
the taxation of small pension pots is still subject to ongoing review
within HM Treasury and HMRC, this report would not be complete
without also acknowledging that this remains an area of complexity
for pensioners.
51http://www.hm-treasury.gov.uk/d/consult_early_access_pension_savings_summary_responses.pdf
3.138 We note that one further change to the rules is
already in progress. Regulations are to be made to extend the
provisions which allow individual small pension pots up to a value of
£2,000 to be commuted for a lump sum (in addition to the
£18,000 overriding limit), to apply to personal pensions, as
well as occupational pensions52. There is, however,
no limit on the number of occupational pensions which can be drawn in
this way, whereas for personal pensions, an individual will be
allowed a maximum of two in a lifetime.
52See http://www.hmrc.gov.uk/pensionschemes/small-pots-guidance.pdf
3.139 The rationale for limiting commutation of small
personal pension funds to two is that individuals have more control
over personal pension funds and could fragment larger pots into
smaller ones to access their funds by way of small lump sums. This is
against the policy intent of providing tax reliefs for pension saving
in return for an income in retirement. Therefore to manage fiscal
risks there is a limit of two small personal pension pots per
lifetime.
3.140 Whilst the OTS understands this limitation as a proxy
for anti-avoidance, it does have the unfortunate effect of adding to
complexity and confusion for those with small personal pensions. It
could also burden pension providers with the costs and complexity of
administering more small pots than would be the case without the
restriction. We do question how significant an avoidance risk exists,
given the small amounts involved.
3.141 There are, however, areas where further
simplification might be explored.
H1 Tax reclaims relating to trivial commutation
3.142 Administrative complexity remains. The way in which
PAYE operates on the taxable element of the lump sum, usually
resulting in the application of an emergency tax code (the basic,
i.e. not age-related, personal allowance code used on a
'month 1' basis), means that the majority of
pensioners taking a trivial commutation lump sum will be over-taxed
at source and have to claim a repayment.
3.143 The repayment claim is made using form P53, the
processes for which do not always work smoothly. The claim also has
to be administered in two stages – an in-year claim to obtain
the refund as soon as possible, followed by an end of year
reconciliation (either through completion of a further P53, HMRC
issuing a P800 calculation, or completion of a self assessment tax
return, depending on the circumstances).
3.144 This therefore suggests that it might be better,
particularly with the opportunity of RTI introducing changes to the
PAYE system in the near future, to review the application of the PAYE
Regulations to trivial commutation lump sums and consider ways of
either preventing the overpayments from arising at the outset, or by
using RTI data to identify overpayments and issue refunds
automatically and at a much earlier stage in the process.
3.145 In the meantime, however, the OTS is aware that HMRC
has recognised the administrative issues around trivial commutation
and is currently running a project on this subject. Working closely
with Tax Help for Older People, the Low Incomes Tax Reform Group and
pension industry representatives, the project is seeking to improve
the quality of guidance given by HMRC to pension scheme members to
offer greater clarity of options at the point of entitlement, to
significantly redesign the P53 and to simplify the associated process
for claiming repayment.
3.146 In addition, the OTS recommends that form R43 (which
non-resident taxpayers use to claim trivial commutation tax refunds)
is reviewed as a matter of priority, as it is out of date.
H2 Further review of the legislation
3.147 There is also complexity within the trivial
commutation rules themselves.
3.148 Consistency with other pension rules is one area of
contention. To take a trivial commutation lump sum, the pensioner has
to be aged 60 or over, i.e. five years older than the earliest normal
retirement age of 55 for private pension savings. Also, the state
pension age for women is gradually increasing from an original base
of 60 to be aligned with that of men, and then the state pension age
for both will increase first to 66 then higher. It might be apposite
to review whether an age of 60 for this purpose continues to be
appropriate. At this stage, however, we make no recommendation on
this subject, merely noting it as a point of inconsistency.
3.149 There is a further complexity in having a
'12-month rule': i.e. that if a pensioner has multiple small
pots, all trivial commutations have to be paid within a 12 month
period commencing when the first commutation is paid.
3.150 This rule can cause complications for taxpayers who
discover another small pension too late to draw it within the 12
month window. As there is already an overriding monetary limit of
£18,000 on the amount which can be taken as trivial commutation
lump sum payments, there could be an argument to simplify the rules
by removing this restrictive time limit.
3.151 Such a change would also simplify matters for pension
providers who are currently left with the burden of administering
small pension pots for those who have missed the 12 month window.
3.152 With the introduction of auto-enrolment in pension
schemes from April 2013, coupled with the increasing number of jobs
individuals have in a working lifetime, it is easy to envisage that
the number of pensioners reaching retirement age with a number of
small pension pots is likely to increase.
3.153 Since the trivial commutation limit was decoupled
from the lifetime allowance in Finance Act 201153
it has now been fixed at £18,000 without any provision for
regular adjustment for inflation. Similarly, the other small pots
limit has been fixed at £2,000 since it was introduced. There is
an argument for annual indexation of both limits in line with
inflation to maintain in real terms the availability of the
provisions (which are in themselves a simplification measure). This
would preserve the benefits of the limits for pensioners and pension
providers.
53paragraph 4 Schedule 18 FA 2011, amending
paragraph 7 Schedule 36 FA 2004
I. Overseas pensions paid to UK residents
3.154 Whilst HMRC states that currently some 76,000 UK
resident pensioners have an overseas pension, the OTS suspects the
numbers who will have such sources of income will increase in future,
given greater international mobility of workers.
3.155 For this reason, now might be an ideal time to review
the tax position of overseas pensions paid to UK residents.
I1 The 10% deduction
3.156 In Annex A, we explore the history of granting a 10%
deduction against foreign pension income, so that only 90% of the
income is taxable in the UK.
3.157 Some of those to whom the OTS spoke suggested that
this deduction may be underclaimed, given that knowledge of its
existence is likely to be limited.
I.2 Guidance on taxation of overseas pensions
3.158 We have also gathered examples of pensioners finding
it difficult to determine the UK tax treatment of foreign state,
occupational or private pensions. Taxpayers might assume that because
their overseas pension is not taxable in the country of origin, it is
not taxable in the UK either.
3.159 Cases have also been seen where the taxpayer
incorrectly claimed double tax relief in the UK for tax deducted in
the country of origin, unaware that they should have applied to have
it paid gross in that country (or claimed a refund in that country)
because the UK has sole taxing rights as the country of residence.
The incorrect claim has only later been revealed through HMRC
compliance activity.
3.160 It is suggested that HMRC guidance in this area
requires review and improvement.
3.161 We also note the practical difficulties that arise
with fluctuating exchange rates54. This is
inevitable but we think that the issue needs to be considered to see
if there is a way of managing modest fluctuations.
54It is worth noting that this is a much
greater problem in Northern Ireland compared with the rest of the
UK, due to the numbers of pensioners drawing pensions from the
Republic.
J. Collecting tax – PAYE
3.162 The change of PAYE computer from the former
Computerisation of PAYE (COP) system to National Insurance and PAYE
Service (NPS) has been the subject of a good number of submissions to
the OTS. This is because of what might be termed
'legacy issues', with the new system now
identifying cases where taxpayers were not having the correct PAYE
deductions from their income in the past. We support the move to NPS
is overall positive once the initial problems have been sorted
out.
3.163 Pensioners have not escaped the impact of these
changes. For approximately 250,000 state pensioners, the Government
announced that tax for certain past years would not be collected
where data from the DWP was not matched to their tax records which
caused tax to be under-deducted from them55.
55Written Ministerial Statement on 11 January
2011 by the Exchequer Secretary to the Treasury (David Gauke MP),
see
http://www.publications.parliament.uk/pa/cm/cmtoday/cmwms/archive/110111.htm
3.164 The OTS is concerned that there is still some
complexity working its way through the system for tax years up to and
including 2010/11. Whilst the object of this report is to look at the
complexity of the system as it is now, we would not be fulfilling our
brief if we did not mention these issues and their continued impact
as underpayments are collected, perhaps spread over a number of tax
years. It is also important to learn from this situation in order to
identify how simplification could be achieved in future.
3.165 The lesson to be learned from the past is that it is
better to ensure so far as possible that the correct tax is paid as
early as possible, preferably within the tax year in which it is due,
to avoid overpayments or underpayments accruing which have to be
reclaimed or collected later. It also emphasises the need for prompt,
regular PAYE reconciliations – something we understand that
HMRC has in hand.
3.166 This is especially important for pensioners who are
often on a fixed income and for whom debt may be something which has
been avoided throughout their working life and which would be a
source of serious concern, particularly if it arises unexpectedly as
has been the case with many tax underpayments.
3.167 This makes the reform of the PAYE system with, from
2013, the addition of RTI56 important for
pensioners. Under RTI, HMRC will have data available to them much
earlier and, although there will always be the need for PAYE
reconciliations, the OTS hopes that these developments will lead to
improvement in the accuracy of coding for pensioners.
56RTI is the proposed system under which
employers and pension payers will submit data to HMRC as payments
are made to employees and pensioners, rather than an annual
submission as is currently the case.
3.168 Issues raised and suggestions put forward to the OTS
during preparation of this interim report are outlined below,
although these should not be taken as recommendations of the OTS.
However, the volume of issues and possible solutions suggested does
indicate that this is an area requiring more detailed examination in
the second stage of our review. We acknowledge, though, the work HMRC
has already been doing in this area.
J.1 Eliminate any errors remaining in NPS
3.169 We understand that HMRC has recently been conducting
a 'deep dive' review in conjunction with the agent
community as part of the NPS stabilisation programme. From this, HMRC
hoped to identify and eliminate ongoing issues with the software. It
may be that matters are now settling down and the problems put to the
OTS during our review were of historical rather than current
interest.
3.170 However, we do think that a further review should
take place after the 2012/13 coding run. We understand this will be
taking place as we finalise this interim report. It is therefore an
issue to which we would like to return in the second stage of our
review.
J.2 A single, reconciled statement to replace multiple P2 coding
notices
3.171 For those with multiple small pensions, receiving a
coding notice for each can be confusing, so it has been suggested
that HMRC should issue taxpayers with a single, collated and
reconciled statement of PAYE codes instead of issuing multiple coding
notices to taxpayers.
3.172 Also, the PAYE Regulations provide certain exclusions
for the issue of PAYE coding notices, so taxpayers might not get them
for all sources which can further contribute to confusion and
complexity. Sending a coding notice for every source of PAYE income
might have cost implications for HMRC, but it would better enable
taxpayers to check their affairs. In this respect, there is now a
potential difference in treatment between self assessment (SA) and
PAYE taxpayers, as SA taxpayers should now be able to view their PAYE
codes online, but the latter cannot57.
57See http://www.hmrc.gov.uk/news/view-paye-online.htm
3.173 Some of those we consulted thought that a single,
reconciled statement or coding notice was one of the longer term
goals on introduction of NPS. Progress to date has been limited to
HMRC introducing a system last year to send two coding notices to a
taxpayer in the same envelope; but those with more than two sources
still receive multiple envelopes.
3.174 Such an exercise could be made easier if the codes
were in themselves easier to understand.
3.175 PAYE tax codes are usually made up of numbers and a
letter, for example 747L being the basic personal allowance tax code
for many people in 2011/12.
3.176 Matters become complicated when a pensioner has
multiple sources of PAYE income, with parts of their personal
allowance allocated to each. As noted in section B, married
couple's allowance causes particular difficulties.
3.177 It has been suggested to the OTS that it might be
clearer for pensioners (and indeed others) if the PAYE system were to
use the full allowances in the number rather than knocking off the
final digit. The letter would need to be retained for other purposes,
but retaining the full allowance figure (e.g. 7,475L instead of 747L)
would seem to make codes, and their accompanying notes, simpler to
explain.
3.178 Furthermore, 'K codes' cause complexity and
are notoriously difficult to understand. These arise when the sum of
the deductions from allowances (i.e. the income or other adjustments
taken into account in arriving at the code) is greater than the sum
of a taxpayer's allowances. So if, for example, a pensioner has a
state pension of £10,000 and a personal allowance of
£9,940, a K code might be applied against their private pension
income.
3.179 Reducing the numbers of K codes in operation for
pensioners would in turn reduce the challenge of having to understand
them, and we discuss how this could be achieved by operating PAYE on
the state pension at section F of this chapter, above.
3.180 In the absence of PAYE being operated on the state
pension, a further suggestion is that HMRC should provide better
explanations of K codes.
J.3 Payslips for pensioners
3.181 It has also been suggested that it would be helpful
if HMRC could provide an indication on coding notices of how much tax
the individual should expect to see deducted from each source, so
that it can be checked against payslips. The OTS acknowledges that
this would be difficult for HMRC, but we believe the feasibility of
so doing could be explored, particularly in the context of the wider
transparency agenda58.
58See Modernising the personal tax system -
tax transparency for individuals (customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageVAT_ShowContent&propertyType=document&columns=1&id=HMCE_PROD1_031736%20)
3.182 Furthermore, we understand that many pension
companies now only send an annual P60 and do not send monthly
payslips (or they only send a payslip or statement when the amount of
the pension or tax code changes). This makes it difficult for
pensioners to understand their income and tax position. Employers are
obliged to issue payslips59. Queries over why
pension providers have no such obligation, and whether they should,
have been raised regularly in the initial stages of our pensioner
taxation review.
59Section 8 Employment Rights Act 1996,–
see http://www.legislation.gov.uk/ukpga/1996/18/section/8
J.4 Starting to receive a pension
3.183 In some cases where pensioner tax underpayments arose
for earlier tax years which have now been reconciled by the NPS
system, P46(Pen) procedures do not always seem to be followed. That
is, that pension providers may not have notified HMRC of a new source
of pension income as they should have under the PAYE
Regulations60, thus causing, or contributing to,
the underpayment.
60Chapter 3 Part 3 of the Income Tax (Pay As
You Earn) Regulations SI 2003/2682
3.184 The absence of the P46(Pen) means that information
about the new pension is not supplied to HMRC immediately and
therefore HMRC would not know to review the pensioner's PAYE
codes and issue a correct coding to the pension provider. As a result
of the pension provider applying an emergency (personal allowance
'month 1') code in the meantime, substantial underpayments
have accrued where the pensioner was already getting the benefit of
their personal allowance against another source of PAYE income.
3.185 The law has little comfort to offer the pensioner in
such situations, because HMRC has no real means of enforcing the
submission of the P46(Pen) – for example, there are no
penalties for failure to comply. In the meantime, the pension
provider is likely to have operated the default code specified in the
Regulations, which is, technically speaking, correct. HMRC's view
is that the pensioner themselves should have been aware that the
default code was resulting in insufficient tax deductions and,
further, that they should have known to contact HMRC and asked them
to review the code61. However, given many
pensioners' particular difficulties and poor understanding of
their taxes and the PAYE system (See Annex B) it is difficult to see
how they would know to take such action. For example, if the P46(Pen)
is not completed by the company, the pensioner is unlikely to know,
as there is nothing to trigger the pensioner to check HMRC's
website to check if HMRC had received a copy of the P46(Pen).
61http://www.hmrc.gov.uk/incometax/check-right-tax.htm#1
says, “Check that the different letters and numbers
that make up your tax code are right. This is really important if
you've got more than one job or source of income - or if you
change jobs a lot." HMRC's website http://www.hmrc.gov.uk/incometax/starting-work.htm#7
also says “Your employer will send HMRC a P46(PEN)
Notification of Pension Starting form and give you a copy to keep.
HMRC will use the information to give you a new tax code and make
sure you pay the right amount of tax."
3.186 There is therefore some suggestion that HMRC should
have stronger powers to force pension payers to correctly apply the
PAYE Regulations. Also, using the existing Regulations, HMRC's
employer compliance teams could undertake a review of this area to
ensure that P46(Pen) procedures are followed.
3.187 It is hoped, however, that once RTI is fully
operational, HMRC should be able to identify much sooner cases where
employers and pension providers are not operating the PAYE code they
have been issued and to take corrective action.
3.188 Furthermore, P45 and P46(Pen) procedures vary
depending on how the person becomes a pensioner.62
This is a crucial matter for making sure a pensioner's tax
affairs are correct from the time they start drawing their income; or
at least to ensure that no underpayment of tax arises of which they
are notified on a later reconciliation of their PAYE records. Again,
the introduction of RTI might improve matters in that HMRC should be
made aware of new pensions much sooner and be able to reconcile
taxpayer records to minimise any underpayment accruing. But even so,
it might be preferable to amend the regulations to require use of a
default code of 'BR63' on
payment of a new pension instead of the emergency code, which gives a
personal allowance on a month 1 (non cumulative) basis.
62See Regulations 55 and 58 SI 2003/2682
63i.e. deduction of tax at the basis rate
3.189 Oddly enough, these same Regulations come into effect
when a pensioner takes a trivial commutation lump sum (see section H
above on small pensions) but often lead to over-taxation in that
scenario.
3.190 We think that now is an opportune time, with RTI in
prospect, to review the operation of these Regulations to identify
possible changes.
3.191 The operation of these Regulations causes problems
within certain professions from which early retirement is common, but
where the taxpayer finds work elsewhere or takes another job with the
same employer on different terms, e.g. armed forces, NHS workers,
police.
J.5 Annual reconciliation and tax calculation forms P800
3.192 A common issue put forward to the OTS is that
taxpayers, including pensioners, have difficulty in understanding the
P800 end of year reconciliations sent to them advising of an
overpayment or underpayment of tax.
3.193 For example, the form can include estimated figures
(such as estimated bank interest) but there is no indication on the
calculation of this fact. It can also omit non-PAYE income if HMRC
does not know about it. The taxpayer is not alerted to the fact that
the calculation is wrong.
Box 3.J: Example
A Tax Help for Older People adviser assisted Mrs K
in claiming tax repayments on her bank interest for a number
of tax years. Subsequently, in December 2011, she was sent a
P800 tax calculation for the 2010/11 tax year, without any
repayment claim having been made. This calculation included
an estimate of £1,000 bank interest for the year, with
tax deducted of £200 and produced a tax repayment of
£162.72.
If she had received less bank interest than estimated, with
consequently less tax deducted at source, this repayment of
tax would have been excessive. However, the P800 calculation
itself gave no indication that the interest figure was
estimated.
|
3.194 Also, there is often a very limited explanation on
the form as to why an underpayment or overpayment of tax has
occurred. It can be difficult for the pensioner with multiple
pensions (or indeed employment income in addition to pensions) to
understand the calculation as all are conflated into a single line
'PAYE income' on the face of the
calculation64.
64For a graphic illustration of the problems
that can be caused by P800s, see Robert E Clark v HMRC (First Tier
Tribunal TC01164)
3.195 Whilst we understand that the above does not only
affect pensioners, addressing these complications could achieve
significant simplification for that sector of the population, as they
are more likely to have multiple PAYE income
sources65.
65The OTS notes that there are other groups
which might be likely to have multiple sources of PAYE income
– examples include agency workers, seasonal workers and
students.
J6 Ceasing work in the tax year and claiming a repayment
3.196 Form P50 is used to claim a repayment of PAYE before
the end of the tax year. In a pensioner context, one of its uses is
where the taxpayer has retired permanently and is not receiving a
pension from their former employer.
3.197 The OTS understands that this form is often found to
be complex by those attempting its completion and it may, together
with the processes surrounding it, benefit from further review and
simplification.
J7 Determining pensioners’ PAYE codes and form P161
3.198 Currently, HMRC procedures for determining
pensioners' PAYE codes revolve around form P161 and, in
bereavement cases, form P161W.
3.199 Automated triggers for the current P161 pension
coding form issue are:
- a woman reaches state pension age (currently moving from age 60
to 6566);
- a man reaches 65 (state pension age, and also the age at which
age related allowances need to be considered);
- a woman reaches 65 (the age at which age related allowances
need to be considered); and
- a new occupational pension starts and is advised to HMRC on a
P46(PEN) electronic starter form (as long as a P161 has not been
triggered within the previous three months).
66Under the Pensions Act 2011 women's
state pension age will increase more quickly to 65 between April
2016 and November 2018. From December 2018 the state pension age
for both men and women will start to increase to reach 66 in
October 2020.
3.200 The planned automated flow of state pension
information from DWP to HMRC, together with the opportunities offered
by the introduction of the NPS has resulted in a review of form P161
and its automated triggers.
3.201 As a result of this review, HMRC envisages that, by
October 2012, the only automated trigger for the new P161 will be
when a man or woman reaches 65 (the age at which age related
allowances need to be considered). The form however will be reduced
from a 2 page (4 side) form to a 1 page (2 side) form. Its purpose
will also change, the questions being aimed at obtaining the
additional income information needed to calculate age allowances. It
will not include questions relating to information HMRC already
holds, such as state pension.
3.202 In turn, HMRC envisages that the volumes of forms
P161 issued will be reduced, from 1.25 million currently (the number
for the last complete tax year i.e. 2010/2011)67 to
a projected figure of up to a million from October 2012.
67HMRC data
3.203 The state pension age will move from 65 to 66 in due
course, but the trigger for agerelated allowances and form P161
is linked to age 65.
3.204 The OTS understands that an online version of the
form is also under development and is planned to be available from
October 2012, which is welcome as long as the paper option and a
telephone helpline remain to support those do not have on line
access.
3.205 Whilst these are welcome developments, the OTS notes
that there remains concern amongst external parties that pensioners
might not have the opportunity to check all the data that HMRC holds
about them and on which subsequent coding is based. Suggestions for
aiding this process have included sending a pre-populated form to
pensioners to check the details; or, as suggested above, developing a
single statement coding notice which reconciles all the data and sets
it out clearly for the pensioner to follow.
3.206 We also note that processes for the self-employed
reaching state pension age might need to be reviewed. In such cases,
the P161 is not issued automatically and HMRC's website advises
the self-employed as follows:
Box 3.K: Extract from HMRC website guidance on form
P161
“When you're nearing State Pension age you'll
receive form P161 Pension Coding asking for details of your
age and income, including pension income. It's very
important that you complete and return this. However if
you're self-employed you won't automatically receive
the form - you'll need to request it from HM Revenue
& Customs (HMRC) or download one
below.”68
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68http://www.hmrc.gov.uk/pensioners/approaching-why.htm
3.207 But some self-employed people will draw on private
pension income when they retire, which will need PAYE coding, and so
it would seem logical to have some automatic procedure in place for
them, as there is for employees. The statement in the box is also
confusing and contradictory, first implying that taxpayers will
receive the form, then saying that they might have to ask for it.
3.208 As noted above, HMRC is implementing changes to the
P161 system. We understand that the self-employed will still not be
sent the new age allowances claim form automatically, as HMRC will
anticipate that their claim to such allowances will be made on their
self assessment tax return. However, the OTS is concerned that there
might be gaps in this process, for example where the self-employed
retire before age 65 (perhaps through choice or ill-health) and live
off other means such as capital or investments (i.e. non-PAYE income)
in the meantime. This is a matter for further consideration in the
second stage of our review, during which time we understand the new
P161 processes will be implemented.
K. Collecting tax – self assessment
3.209 HMRC data for 2009/10 shows that there were some 2.3
million pensioners in self assessment (SA) for that year, using the
OTS's definition outlined in the introduction to this report. Of
those, some 1.5 million filed by internet, 342,000 filed full paper
tax returns and 474,000 filed the short paper tax return.
3.210 Our review has sought to identify whether there are
ways of minimising the number of pensioners who have to file tax
returns each year, as this obligation can create administrative
complexity for the pensioners and their advisers. There is also a
cost to HMRC in processing the returns, collecting tax payments and
dealing with associated queries and correspondence.
3.211 The OTS has also noted suggestions for simplifying SA
processes. 3.212 Suggestions have included:
- Apply a tolerance to the tax owed under self assessment by
low-income pensioners in the same way as there is a PAYE tolerance
for end of year reconciliation, below which no tax is collected.
This is - £50 for the 2010/11 tax year. This could remove
pensioners with small liabilities from the system, with the tax
cost potentially offset by administrative savings for HMRC. It is
acknowledged, however, that this might be difficult to achieve for
pensioners alone, so could have wider implications.
- Giving the taxpayer the option to elect for the K code
overriding limit 'the 50% rule69' not to
apply, if it means that all their tax can be collected via PAYE
instead of SA.
- HMRC should investigate pre-populating self assessment returns
with data already held on the department's systems. Some hold
the view that HMRC often has all the data it needs to work out the
tax and the return is just a formality, for example in some cases
where age allowances are tapered but the taxpayer has PAYE income
only70. The OTS notes that work has already begun
on identifying support for prepopulation of forms alongside
greater transparency, so we hope that the second stage of our
review can help to inform this further by taking into account the
results of the current consultation on modernising the personal tax
system71.
- HMRC generates unnecessary administration and subsequent
taxpayer contact/queries by making small amendments to tax returns.
For example, as outlined above, mistakes often occur where
taxpayers return an incorrect amount of state pension. HMRC data
shows that, for 2009/10, 25,267 corrections were made to main tax
returns and 10,512 to short tax returns. HMRC's adjustment may
only make a very small difference to the tax liability, in which
case the cost of making the correction and dealing with the
associated queries could exceed the tax charged.
- These problems might be minimised by other solutions put
forward in this interim report, for example, taxing the state
pension at source or providing a P60 equivalent for state pension
to minimise error. But otherwise, HMRC might consider whether there
is merit in disregarding small discrepancies in the figures and
suppressing tax calculations which make less than, say £10
difference, to the tax liability. More work would need to be
carried out to ascertain the practicality of this proposal, for
example, HMRC might not know the impact on the tax liability until
the work has been done, in which case there might be little
administrative saving; or indeed it might be necessary to accept
that the £10 difference would apply either way and therefore
potentially cost taxpayers where the error was in HMRC's
favour.
- There is only a single box for private pension income on the
paper SA tax return so the taxpayer has to add up all pensions, and
add up the tax deductions, then enter each as a single figure
(although there is a separate box for lump sums). They then have to
list how the figures are made up (specifying each separate pension)
in the additional information 'white space' of the return.
This can lead to arithmetical errors and confusion.
- HMRC should review their policy of not 'coding out'
overseas pension income paid to UK residents72
which in turn leads to those affected having to fill in self
assessment returns73. Exchange rates will vary
the annual amount received but rarely by significant amounts over a
year (e.g. in one case quoted by Tax Help for Older People, a
Canadian pension ranged between about £794 and £803 a
month). Coding out is administratively simple and improves cashflow
for the Exchequer, leaving just the balancing exercise via SA or
the P800 reconciliation process. In fact, the PAYE Regulations
provide that HMRC must have regard to 'any
other income of the employee which is not PAYE income' unless
the employee objects, so this policy may in fact be ultra
vires74. HMRC figures suggest that 76,000 UK
pensioners have an overseas pension but the OTS suspects this
number will increase in future with greater international mobility
during working lives.
69Where a K code is operated it must not cause
the tax deducted from any payment of income to be more than 50% of
the income – regulations 23(5) and 28(5) of the PAYE
regulations read with the definition of “overriding
limit” in regulation 2
70See SAM100050 – some taxpayers whose
age allowances are tapered may, on request, be removed from self
assessment if their affairs are straightforward.
71HMRC consultation document 'Modernising
the administration of the personal tax system: Tax transparency for
individuals'
72http://www.hmrc.gov.uk/manuals/pommanual/paye130055.htm
73http://www.hmrc.gov.uk/manuals/sammanual/SAM100050.htm
74See PAYE Regulations (SI2003/2682),
regulation 14 (Matters relevant to determination of code), in
particular regulation 14(1)(f)
L. Support for bereaved pensioners
3.213 Bereaved taxpayers and the implications of dealing
with bereavement are of course not matters exclusive to pensioners.
However, it is naturally more likely that older people are likely to
lose a spouse or civil partner and therefore have to deal with the
tax consequences.
3.214 There are three elements to consider:
- finalising the tax affairs of the deceased;
- tax on the estate (although inheritance tax is outside the
scope of this review, there is income tax and sometimes capital
gains tax to deal with during the administration of the estate);
and
- the tax affairs of the surviving spouse or civil partner, which
may well have changed due to pension income or other assets having
been inherited from the deceased.
3.215 All of these complications come at a difficult time
for the surviving partner and their family (if they are fortunate to
have other family or friends to support them).
3.216 The OTS understands that HMRC is already engaging in
some work internally, in conjunction with some sections of the
charity community, to ease the burden on bereaved taxpayers.
3.217 When a taxpayer loses a spouse or civil partner,
there is frequently a shift in their own income levels (for example,
due to starting to receive a widow's pension). The PAYE system
often does not react sufficiently quickly or efficiently and a tax
underpayment might occur.
3.218 It is a welcome development therefore that the OTS
understands HMRC is planning to introduce from April 2012 a new
version of form R27 Potential repayment to the estate. It is
intended that this new version will have two key enhancements over
the former version:
- the facility to nominate an agent on the R27, as opposed to
sending a 64-8; and
- the introduction of a section that brings the tax consequences
of the bereavement on the surviving spouses and civil partners into
consideration.
3.219 The OTS believes that this should help towards
simplification for those affected, and believes that HMRC should
continue to evaluate the success of this measure and explore whether
there are any other opportunities to exploit information from the
'Tell u()s once' initiative when a death is
registered to ensure HMRC takes prompt action in as many areas as
possible.
3.220 It has been suggested that HMRC's main contact
centre staff may not have sufficient breadth of training to deal with
this particular situation and a dedicated bereavement helpline might
therefore help ease the burden. We understand that HMRC is already
working on this and a single point of contact for the bereaved to
contact HMRC about income tax issues should be in place by April
2012. HMRC has also committed to look at the scope for joined-up
working across the rest of HMRC's business over the next 12
months. We welcome this initiative.
3.221 The OTS understands that HMRC is also undertaking a
review of its standard correspondence in bereavement cases. Again,
this is a welcome development.
3.222 It is perhaps also worth noting here that Lord Freud,
Minister for Welfare Reform, has recently commissioned a review of
bereavement benefits, which includes both a social research project
to better understand people's recent experience of receiving
bereavement benefits and a consultation document75.
The OTS recommends that HMRC consider carefully the research being
conducted, to see whether it offers any insights into bereaved
pensioners' tax experiences.
75DWP consultation: Bereavement Benefit for
the 21st Century, December 2011
http://www.dwp.gov.uk/consultations/2011/bereavement-benefit.shtml
M. National insurance contributions (NICs)
3.223 The OTS has some concerns that future complexity
could arise for pensioners if changes to the state pension age are
not aligned with national insurance contributions policy. We are of
course aware that integration of the administration of income tax and
NICs is the subject of consultation and review. Indeed, that review
stemmed from an earlier OTS recommendation76.
76http://www.hm-treasury.gov.uk/d/ots_review_tax_reliefs_final_report.pdf,
see page 12
3.224 One example of confusion in the current system is
that class 1 and class 2 contributions cease at state pension age
whereas class 4 is charged for the whole year in which one reaches
state pension age. This is a source of confusion, especially for
those who reach state pension age early in the tax year.
3.225 Another point to note is that NICs cease at state
pension age for workers, but employers continue to pay them. However,
we have not considered this to be a matter within the scope of our
review as it is a policy matter and outside the remit of the OTS.
N. Other administrative issues
3.226 The OTS has found that complexity arises not only
from the difficulties of the underlying legislation, but also in how
it is communicated to taxpayers.
3.227 Administrative complexity is not exclusive to
pensioners, but as part of this review, the OTS received a number of
comments from contributors as to how pensioners could be helped to
navigate the tax system. These included:
- HMRC should give a clear call to action in written
correspondence, or make it clear if letters are for information
only;
- HMRC should aim to resolve an issue at the first point of
contact. Pensioners complain that it takes a number of calls,
letters or both to HMRC to resolve a query;
- improve pensioners' ability to get through to helplines
– indeed that there should be a dedicated pensioner
helpline;
- improve responses to post, including faster handling of post
and answering all points raised; and
- review the ability to access face to face services, including
home visits; and
- Introduce a dedicated voluntary sector helpline.
3.228 The key is that HMRC must recognise that the
pensioner population is far from homogenous and that they have
varying needs in terms of ways of accessing information. HMRC must
continue to provide all methods of accessing information.
3.229 Equally, the OTS acknowledges that HMRC has made, and
is continuing to make efforts, to address some of the above
points.
3.230 For instance, HMRC has put in place a dedicated
pensioner team on their helplines and the OTS has received some
positive feedback from this initiative. It is understood that HMRC is
also working with the agent community to review handling of post and
to consider options for working with tax agents, including the
voluntary sector, with the aim of making it easier for taxpayers to
be assisted by others without necessarily having a traditional agent
'64-8' relationship in place.
3.231 If successful, these initiatives are welcome
simplifications. We suggest that the OTS continues to monitor
developments throughout the second stage of the pensioner tax
review.
N1 Face to face services, including home visits
3.232 From those the OTS has consulted in the compilation
of this report, there is a strong view that pensioners are more
likely to need face to face support to deal with their tax affairs
than others.
3.233 At present, this support can come from:
- HMRC itself;
- the paid agent community;
- the voluntary sector, including specialist tax charities
3.234 HMRC does not specifically record the number of home
visits to pensioners. However, they have been able to tell us that
there were 3,234 home visits in total in 2010/11 and that home visits
are only made to the elderly, disabled, recently bereaved and those
with caring responsibilities or mental health problems.
3.235 By contrast, we understand that Tax Help for Older
People, a service run by the charity tax volunteers, conducted 2,354
home visits to pensioners in the year to 31 December 2011 and, in
that same period, they helped 1,923 others face to face at a variety
of venues across the UK.
3.236 Although a direct comparison cannot be made between
HMRC and the DWP, the two departments having quite different
functions, the DWP has advised us that for 2010/11, their Local
Service (now DWP Visiting) conducted 465,000 visits, either at
community based locations or by home visit. 91.5% (425,000) of these
face to face contacts were to pensioners. It is estimated that 98%
(417,000) of these contacts were conducted by home visit.
3.237 Providing face to face services to meet pensioner
needs of course does not simplify the system itself, but can make a
complex system easier to navigate.
3.238 Indeed, we understand that HMRC has received positive
feedback from the pensioner community surrounding their offices in
East Kilbride. Staff from that office's 'Customer
Focus Unit' attended events run by local councils to support and
educate pension and benefits recipients and raise awareness of
tax.
3.239 As part of this, the staff have put together paper
information for pensioners (HMRC's web-based IR121, supplemented
by other material printed from the HMRC website) to hand out at the
meetings and have reported that this was well received. By offering
this direct communication with the pensioner population, they have
been able to answer simple queries, allay fears and concerns, and
guide pensioners on how their tax will work in retirement and what to
look out for.
3.240 The OTS view is that a combination of initiatives is
required to help simplify tax for pensioners and one factor is
ensuring there are avenues for face to face support where it is
needed.
N.2 Digital exclusion
3.241 As noted above, the HMRC contact centre in East
Kilbride has found it useful to have a paper leaflet helping to
explain pensioner tax matters to distribute at events where they meet
taxpayers. Other organisations77 also produce paper
leaflets to help pensioners understand tax matters as part of their
overall preparations for retirement.
77For example, Tax Help for Older People
3.242 But our initial review has found that the bulk of
HMRC's tax information for pensioners, as well as others, is now
only available online. This might be via the Directgov website,
Businesslink for the self-employed or HMRC's website.
3.243 Taxpayers do not necessarily know to look for
information on the internet, particularly if there is nothing to
prompt them to do so. And for pensioners, there is a further hurdle
in that their usage of the internet is generally considered to be
lower than for other sectors of the population.
3.244 In the third quarter of 2011, there were still over
2.25 million people in the UK aged 65 to 74, and over 3.31 million
aged 75 and over who had never used the
internet78.
78Office for National Statistics, Internet
Access Quarterly Update 2011, Q3
http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm:77-238450
3.245 While finding information online and conducting
transactions online, with HMRC and others, might have become the norm
and the simplest option for many, the OTS is concerned that some
pensioners are being excluded. Simplification options might come in
the form of help from other organisations to access online
information or support pensioners to contact with HMRC online.
O. Gift aid
3.246 Non-taxpayers can have a tax refund restricted or
even unwittingly create themselves a tax liability, if their tax
liability does not cover the tax reclaimed by a charity or community
amateur sports club on a gift aid donation.
3.247 Pensioners often find it difficult to understand this
issue and therefore whether or not to make a gift aid declaration in
respect of their donation.
3.248 Basic rate tax is reclaimed by the receiving
organisation on a donation made under gift aid. At current rates,
this means that for every £80 donated, £20 is reclaimed.
But this relies on the donor having paid at least as much income or
capital gains tax as the amount claimed back by the charity on the
donation. Therefore, if the donor is a non-taxpayer or is taxed at
the 10% savings rate, they may not have paid sufficient tax on their
income to cover the tax on their =gift.
3.249 The OTS has not yet investigated this area of
complexity at great length as it did not feature strongly in
discussions with those consulted in the initial stages of our review.
It is also an issue for the general taxpayer population, though
anecdotally we note that the concerns about creating a tax liability
by making a mistake with the gift aid declaration do seem to loom
large with older donors who may be inclined to be more generous.
P. Care and support employers
3.250 The OTS review of pensioner taxation has noted that
there are a number of older people who may become employers of those
who care for them in their own home. They may do so by engaging
carers out of their own means, or through use of 'direct
payments' from local authorities.
3.251 This enables people to tailor their care needs to
their individual circumstances, but can become a minefield if the
implications of employment law and the tax consequences that follow
are not understood. In short, they become employers ('accidental
employers') with PAYE reporting requirements.
3.252 This is not an issue exclusive to pensioners, as it
can affect people of other ages who have care needs due to a
disability.
3.253 The complexities of this situation could form the
basis for a separate report in its own right. As the OTS understands
that work is ongoing between HMRC and external stakeholders to help
offer support to those affected, we have not investigated it in
detail. We would, however, endorse that it seems right to focus
resources and attention in simplifying compliance with the PAYE
regulations for these employers, and that support will be needed on
the transition to RTI in the coming months.
Q. Capital gains tax
3.254 Capital taxes were raised in the initial stages of
our review, but only on the periphery. The OTS's focus has been
on income tax issues and the interactions with welfare benefits to a
much greater extent.
3.255 It is in principle more important that attention is
paid to simplifying the income tax system for pensioners, in that
more people are likely to benefit as a result. That is not to say,
however, that we should not note in this report that capital gains
tax (CGT) can be an issue for some pensioners.
3.256 For example, if a taxpayer needs to go into care
(whether through living with other family members or into a care
home), it can be that their own home is rented out or perhaps left
vacant. Although there are provisions within the private residence
rules for retaining relief for the final 36 months of ownership,
regardless of occupation, and letting relief, a risk may still remain
that full relief is no longer available on an eventual sale. To
address this, an additional provision within the private residence
legislation could be inserted to allow for periods when the owner was
unable to occupy their own home due to personal care needs.
3.257 The OTS has also found that pensioners can be
confused between inheritance tax and CGT. They may have heard of the
'seven-year rule' for gifts not to be counted for inheritance
tax, but unwittingly trigger a CGT charge by giving away chargeable
assets to the next generation and failing to understand the
implications of so doing.
3.258 The OTS is willing to do more work in this area, if
it is thought useful. We would note at this stage that there are a
lot of pitfalls for the older taxpayer who may be contemplating
gifts: for example, the fact that a gift of an asset triggers a CGT
disposal, and that retaining some sort of use of the asset can lead
to income tax complications under the 'pre-owned assets'
rules79.
79http://www.hmrc.gov.uk/poa/poa_guidance1.htm
R. Foreign income, other than pensions – non-UK
domiciled pensioners
3.259 The OTS received some comments that the changes made
in recent years to the taxation of non-UK domiciled individuals have
introduced complexity, as in some instances there could now be a UK
tax issue where there was none before.
3.260 Pensioner cases can come to light where, for example,
older people join other family in the UK after retirement but might
retain property or funds overseas.
3.261 We have not explored these issues in depth in the
initial stages of the review, partly because consultation on domicile
rules was continuing in late 2011 and the issues are not exclusive to
the pensioner population.
S. Pensioners retiring abroad
3.262 With freedom of travel increasing in recent decades,
there are some pensioners who choose to retire abroad. The OTS
acknowledges here that the scope of the initial
informationgathering has been UK-based and we have therefore
not received much in the way of evidence of UK tax complexity arising
for those who have made the choice to retire overseas. This is
therefore an area to which we might wish to return in the second
stage of our review, or perhaps as part of a later project.
3.263 We have, however, touched on some areas in our
meetings with various pensioner representatives and received some
written contributions from British pensioners living abroad.
S1 Administrative problems of living overseas
3.264 Depending on the country in which a taxpayer lives,
the postal system can vary in terms of the length of time it takes to
deliver post; or indeed vary in reliability such that there may be
little certainty that the item will ever arrive at its intended
destination.
3.265 With improvements in technology, it might be possible
to ease such problems if HMRC were to have a clear email channel or
secure Government Gateway system for those living overseas to
communicate with them.
3.266 It has also been suggested to the OTS that it can be
difficult to get a tax repayments sent to a non-UK bank account and
that HMRC finds it difficult to recognise an overseas address in
their systems.
3.267 A further problem for those living overseas who file
SA tax returns is that they are not able to use HMRC's free
online filing software, as the facility does not include the
residence pages. This means they have to purchase third party
software so to do80.
80http://www.hmrc.gov.uk/sa/software.htm#1
3.268 Although we have not carried out an in-depth review
of the material, a query from a pensioner living overseas which came
to the OTS email inbox highlighted how difficult it is to navigate
the guidance on HMRC's website for those who wish to applying for
UK pensions to be paid gross. A form is available to apply for double
tax treaty relief81 but finding it is not
straightforward. Completing it is also likely to be a challenge for
many pensioners given its layout and complex language.
81Form DT-Individual http://www.hmrc.gov.uk/cnr/dtindividual.pdf
4 Priority areas for further review and consideration of
reform
4.1 After having gathered input on the complexities of
pensioner taxation, set out in Chapter 3 of this interim report, the
OTS has sought to prioritise those areas to which precedence should
be given in the second stage of our review.
4.2 As noted in Chapter 2, by combining our research,
feedback from the meetings we held around the country and results
from a survey of our Committee members, we have given a priority
rating of high, medium or low to various areas below.
4.3 Again, we must stress this does not mean that the OTS
is not prepared to consider those areas of lesser priority if we have
the time, resources and support of Ministers to do so. Some areas we
have marked as of low priority for the next stage of our review
because we know work is already ongoing within HM Treasury or HMRC,
perhaps also in consultation with external parties. We have
acknowledged this where appropriate and emphasise the importance of
such work continuing.
4.4 Whatever the priorities the OTS has set out, we welcome
comments from readers of this report on any aspect of the
contents.
4.5 First, we summarise the priority ratings we have given
to each area in a table below, then we move on to explain the reasons
in more detail. We have identified in the table whether matters
require policy attention or changes in legislation, or administrative
simplifications. There are some crossovers, as some issues arise from
both complexity of the law itself compounded by complex
administration.
4.6 We have also summarised in the table below the
suggestions we have made in Chapter 3 for short term improvements
whilst longer term reform of pensioner taxation will be given more
detailed consideration in the second stage of our review. We have
also identified those matters which could be taken forward by the
Government for immediate consideration.
Table 4.A: Priorities list and
suggestions for short term improvements
Issue
|
Priority rating for second stage
of the OTS pensioner review
|
Suggestions for short termor
short term improvements or matters to consider
immediately
|
|
Policy reform / legislative
change
|
Administrative
|
|
A. Age-related allowances
|
A.1 Further consideration of simplification
possibilities
|
High
|
|
|
A.2 Further consideration of improvements to HMRC's
processes
|
|
High
|
HMRC could review their records for cases where the
allowances might be due but not claimed.
|
B. Married couple's
allowance
|
B.1 Further consideration of simplification
possibilities
|
High
|
|
Repeal redundant legislation which provides for a
differential rate of allowance for the under-75s.
|
B.2 Further consideration of improvements to HMRC's
processes
|
|
High
|
HMRC could review the forms relating to married
couple's allowance and provide clearer explanations of it
on the P2 notice of coding.
|
C. Sundry reliefs
|
C.1 Relief for qualifying maintenance payments
|
Medium
|
|
|
C.2 Relief for interest to acquire an equity release
annuity
|
High
|
|
Review the possibility of repealing this provision and
consequent repeal of MIRAS legislation remaining in ICTA
1988.
|
D. Blind person's
allowance
|
Blind person's allowance
|
Medium
|
|
The OTS will not be reviewing this again in the second
stage, but suggests the Government reconsider the OTS's
previous conclusions that the available funds for the relief
would be better utilised by direct grant rather than the
under-used tax relief.
|
E. Savings taxation
|
E.1 The 10% savings rate – considering the case for
its removal
|
High
|
|
|
E.2 Registering for gross interest on savings accounts
– consider changes to the R85 system
|
High
|
|
|
E.3 R85s following a bereavement
|
|
High
|
HMRC and the DWP should review booklet DWP1027 to include
this issue along with other improvements to it on tax-related
matters.
|
E.4 Repayment claims - administrative improvements
|
|
Medium
|
|
E.5 Dividends on overseas shareholdings
|
Low
|
Low
|
|
E.6 Purchased life annuities
|
Low
|
Low
|
HMRC could review the information providers of these
products make available to new annuitants to ensure that it
is clear on how they are taxed.
|
E.7 Interest information from deposit-takers –
consider compulsory issue of interest and tax deducted
certificates
|
Medium
|
|
|
E.6 Obtaining tax refunds on savings
|
Medium
|
|
|
F. The state retirement
pension
|
F.1 Tax and a new state pension – the current system
and changes already in progress
|
|
Medium
|
HMRC should undertake to review all records where a basic
amount of state pension has been coded out in the absence of
a final figure, and ensure that those cases are reconciled
after the year end using final, accurate figures from the DWP
or contact the pensioner if there is any doubt.
|
F.2 PAYE and the state pension
|
High
|
|
|
F.3 Information from the DWP about the state pension
– considering a 'P60 Benefits'
|
|
High
|
|
F.4 Raising awareness of how the state pension is
taxed
|
|
High
|
HMRC and the DWP should review current information,
particularly addressing the immediate anomalies the OTS has
identified in Chapter 3 of this report.
|
F.5 Deferred state pensions – reviewing tax
information
|
|
Medium
|
|
G. Welfare benefits, other than
the state pension
|
G.1 Interaction between tax and benefits
|
Medium
|
|
HMRC and the DWP should review the guidance available to
pensioners on the tax status of welfare benefits,
particularly those paid with the state pension, with the aim
of moving towards providing a 'P60 benefits'.
|
H. Small pension pots
|
H.1 Tax reclaims relating to trivial commutation
|
|
Low (but we
endorse
ongoing work).
|
HMRC should review form R43 as a matter of priority as,
for example, it still includes reference to the first
£70 of interest on an NS & I Ordinary Account being
tax exempt, an obsolete relief abolished following the OTS
review of tax reliefs.
|
H.2 Further review of the legislation
|
Low (but we
endorse ongoing
work).
|
|
Consider annual uprating for inflation of the fixed
trivial commutation limits of £18,000 and £2,000,
and removing the 12- month window for trivial
commutations.
|
I. Overseas pensions paid to UK
resident pensioners
|
I.1 The 10% deduction – review
|
Medium
|
|
|
I.2 Guidance on taxation of overseas pensions –
review
|
|
Medium
|
HMRC should review its guidance, particularly to help
those with cross-border issues between Northern Ireland and
the Republic of Ireland.
|
J. Collecting tax –
PAYE
|
J.1 Eliminate any errors remaining in NPS
|
|
High
|
|
J.2 A single, reconciled statement to replace multiple P2
coding notices
|
|
High
|
As this is likely to be a longer term objective, HMRC
should consider reviewing existing guidance on complex areas
(K codes, for example) as a first step towards
simplification.
|
J.3 Payslips for pensioners
|
|
Low
|
|
J.4 Starting to receive a pension
|
High
|
|
HMRC should consider the operation of the PAYE Regulations
for new pensions together with RTI developments.
|
J.5 Annual reconciliation and tax calculation forms
P800
|
|
High
|
HMRC should look at how soon essential changes could be
made, such as flagging estimated figures and providing
breakdowns of 'PAYE income'.
|
J.6 Ceasing work in the tax year and claiming a
repayment
|
|
Low
|
HMRC should review the extent to which form P50 is used by
pensioners and its practicality in such cases.
|
J.7 Determining pensioners' PAYE codes and form
P161
|
|
High
|
|
K. Collecting tax – self
assessment
|
K.1 Self assessment – operational improvements
|
|
High
|
|
L. Support for bereaved
taxpayers
|
L. Support for bereaved taxpayers
|
|
Low (but we
endorse
ongoing work).
|
|
M. National Insurance
Contributions
|
National insurance contributions
|
Low (because of the
consultation on
merging the
operation of
income tax and NIC
already in progress).
|
|
The Government should look carefully at the situation for
those reaching retirement, particularly with further changes
to the state retirement age in progress, and ensure that
complexities are minimised so far as possible.
|
N. Other administrative
issues
|
N.1 Face to face services, including home visits
|
|
High
|
|
N.2 Digital exclusion
|
|
High
|
|
O. Gift aid
|
Gift aid
|
Low
|
|
|
P. Care and support for
employers
|
Care and support for employers
|
Low (but we
endorse the
ongoing work).
|
|
|
Q. Capital gains tax
|
Capital gains tax
|
Low
|
|
|
R. Foreign income, other than
pensions – non-UK domiciled pensioners
|
Foreign income, other than pensions – non-UK
domiciled pensioners
|
Low
|
|
|
S. Pensioners retiring
abroad
|
S.1 Administrative problems of living overseas
|
|
Low (but we would welcome further submissions as regards
problem areas).
|
HMRC should review the problems noted in section1 of
Chapter 3 above to see if any improvements can be
delivered.
|
A. Age-related allowances
A.1 Further consideration of simplification possibilities
4.7 There is great appetite for simplification of
age-related allowances. The issues discussed to dater review, ranging
from small changes to outright abolition, were outlined in Chapter
3.
4.8 We would stress again that the OTS has not reached any
conclusions as to the best way forward with age-related allowances,
nor have we formulated detailed recommendations. However, we know
that there is little support for leaving both the structure of the
allowances and the way they are administered as they are.
4.9 Our recommendation at this stage is therefore that
age-related allowances should be a high priority in the second
stage of our review and that we would like to consider ways in which
they could be simplified.
A.2 Further consideration of improvements to HMRC’s
processes
4.10 As well as fundamental simplification of the rules,
there are strong views that the administration of age allowances
could be simplified. Whilst we note that HMRC already has some plans
to change the claims process, we have concluded that the second stage
of our review should give high priority to exploring how
further simplification could be achieved.
B. Married couple’s allowance
B.1 Further consideration of simplification possibilities
4.11 The OTS could view the married couple's allowance
together with age allowances to formulate overall recommendations on
a pensioner tax strategy, or it could be considered as a standalone
item for simplification. Either way, we have found strong support for
reviewing the allowance.
4.12 Although various ideas have been discussed in the
initial stages, as outlined in Chapter 3 above, we have not yet
reached any firm conclusions. The OTS therefore recommends that this
is a high priority area for the second stage of our pensioner
review.
B.2 Further consideration of improvements to HMRC’s
processes
4.13 Similarly, there is support for reviewing further the
administration of the married couple's allowance and looking to
identify simplification opportunities. This again is a high
priority area.
4.14 As an interim measure, HMRC could engage with
interested parties to review the forms relating to married
couple's allowance and provide clearer explanations of it on the
P2 notice of coding.
C. Sundry reliefs
C.1 Relief for qualifying maintenance payments
4.15 On its own, we have received little evidence of
complexity of this relief, and mixed responses from our Committee
about its priority in our review.
4.16 However it is, in some respects, linked to the married
couple's allowance. The OTS therefore recommends that we consider
it further as part of the second stage of our review as a medium
priority. If substantive changes are eventually recommended to
the married couple's allowance, leaving this relief untouched,
might be out of step with wider policy changes. C.2 Relief for
interest to acquire an equity release annuity
4.17 For the reasons identified in Chapter 3, we believe
that the Government should give immediate consideration to repeal of
this relief, as a high priority.
D. Blind person’s allowance
4.18 As the OTS has looked at blind person's allowance
before, we conclude that further work on it should not be included
in the second stage of our review. We believe the conclusions and
recommendations in our earlier report remain valid and accordingly do
not believe it is worth us devoting further resources to its
review.
4.19 Nevertheless, in this interim report we recommend
that the Government consider again the proposals put forward in the
OTS's review of tax reliefs, given that the pensioner review
has given support to our previous recommendations by highlighting the
particular issues for older people.
4.20 With an ageing population in prospect, we believe it
is important for the Government as a whole to consider how support
can be offered and accessed in the most straightforward and
appropriate manner for those who develop health problems associated
with older age, such as (but not limited to) loss of sight. For
reasons previously outlined, the current regime of tax relief falls
short of those objectives.
E. Savings taxation
E.1 The 10% savings rate – considering the case for its
removal
4.21 There is strong support for abolition of this rate,
which is viewed as poorly targeted, not understood, under-claimed and
unnecessarily complex.
4.22 But a fundamental question is whether, perhaps as part
of an overall package of simplification measures, those who would
suffer a tax cost from its abolition could somehow be
compensated.
4.23 The OTS therefore recommends that we consider these
issues further as a high priority in the second stage of our
pensioner tax review.
E.2 Registering for gross interest on savings accounts –
consider changes to the R85 system
4.24 As noted in Chapter 3, the form R85 process for
registering to receive gross interest is currently
'all or nothing', i.e. you are either a
non-taxpayer and can receive all your interest gross, or you are a
taxpayer and it must all taxed at source with a repayment being
claimed.
4.25 The OTS has received strong support for considering
how this might be changed so that pensioners with a small tax
liability could opt to have interest paid gross on some accounts but
paid net on others. In the initial stages of our review, however, we
have not had the opportunity to consider in detail how such a system
might work. We therefore recommend this is carried forward as a
high priority to the second stage of our review.
E.3 R85s following a bereavement – improvements to
guidance
4.26 The OTS welcomes improvements to the R27 notes from
April 2012. However, we suggest a further short term improvement
could be achieved if HMRC and the DWP were to work together, with
interested external parties, to review booklet DWP1027 to include
this issue (along with improved guidance on other tax matters). This
is a high priority.
E.4 Repayment claims – administrative improvements
4.27 Simplification opportunities in this area include
reviewing the Form R40 and its processes. As noted in Chapter 3, the
OTS understands that HMRC is already doing some work in this area, in
particular looking at the possibility of introducing an online
version of the form. For this reason, we would not intend to devote
significant resources in the second stage of our review to this area,
but would mark it as of medium priority, keeping a watching
brief on developments from HMRC.
E.5 Dividends on overseas shareholdings
4.28 Whilst the taxation of dividends on overseas
shareholdings is an area of complexity, the OTS has found it to be of
lower priority than other areas. It is also not an issue exclusive to
pensioners.
4.29 For those reasons, we have concluded that it is a
low priority for the second stage of our review, both in terms
of policy and administration.
E.6 Purchased life annuities
4.30 Similarly, although these annuities can be a source of
confusion for those who have them, the OTS has not been made aware
that problems are widespread and the overall view of our Consultative
Committee was that they are of lower priority than other areas.
4.31 Consequently, we again suggest that this is a matter
of low priority for the second stage of our review, but that
HMRC could carry out a review of the information given by product
providers to new annuitants as to how the annuity will be taxed.
E.7 Interest information from deposit-takers – consider
compulsory issue of interest and tax deducted certificates
4.32 Our Committee members' responses were mixed on
this issue, split evenly between those who felt it was of higher
priority and those who marked it as lower priority. Notably, however,
none of the members suggested that the OTS should not consider the
matter at all.
4.33 Our conclusion is therefore that we should consider it
in the second stage of our review as a medium priority.
F. The state retirement pension and its interaction with other
benefits
F.1 Fundamental points – the origins of complexity and
considering whether the state pension should be taxable at all
4.34 Views on this were put forward, but were very mixed,
with some believing the OTS should consider it as a priority, others
believing it should not be considered at all. It is however a major
policy matter and as such is specifically outside our remit –
though we have to have regard to the simplification benefits that
could result in taking our work forward.
4.35 Of course, it is linked to the other issues, and the
OTS has to move forward to the second stage of the review from a base
point. Our initial conclusion is that we should work on the basis
that the state retirement pension remains taxable, but that there are
very strong arguments for changes to improve how it is taxed.
4.36 Changing the basis of taxing the state pension to a
receipts rather than entitlement basis could be a matter for further
consideration, but this is arguably linked to the other matters
above. We are inclined to proceed on the basis that the complexities
could be minimised by improving information (such as providing a P60
equivalent) rather than changing its basis of taxation but we are
open to views on this point.
F.2 Tax and a new state pension – the current system and
changes already in progress
4.37 The OTS welcomes efforts HMRC and DWP are making to
improve the processes for taxing the state pension. This is of
medium priority and in the second stage of our review will be
to keep a watching brief on these developments.
F.3 PAYE and the state retirement pension
4.38 Of all the policy changes discussed during the initial
stages of our review, taxing the state pension at source came up most
frequently and was listed as the highest priority in our
survey of Committee members.
4.39 We therefore believe it essential to carry out further
work on this in the second stage of our review. This would include
considering the costs and practicalities of making such a change as
against the potential savings and number and profile of pensioners it
might help.
F.4 Information from the DWP about the state pension –
considering P60 benefits
4.40 From the meetings held during preparation of this
interim report and responses from surveying our Committee members,
there is near-unanimous support for improving the information given
to state pensioners. Confirmation is needed of how much is taxable
for a tax year, at the appropriate time, i.e. at the tax year end, or
following death of the pensioner.
4.41 In conjunction with considering PAYE on the state
pension, this is therefore a matter of high priority for the
second stage of our review.
F.5 Raising awareness of how the state pension is taxed
4.42 As outlined in Chapter 3, and supported by our initial
findings, assessing how information is provided to new state
pensioners about how their state pension is taxed is a matter of
high priority.
4.43 However, the OTS would first need to establish whether
we will recommend changes to the way in which the state pension
should be taxed, i.e. by operating PAYE on it, before recommending
what guidance should follow.
F.6 Deferred state pensions – reviewing tax
information
4.44 Little evidence was gathered of complexity in this
area in this first stage of our review. However, with people
continuing to work for longer, we would like to explore whether more
people are deferring their state pension and whether existing tools
and support are adequate for those facing this type of decision to
understand the tax and related consequences. We therefore consider
this of medium priority for our second stage.
G. Welfare benefits, other than the state pension
G.1 Interaction between tax and benefits
4.45 From the initial stages of our review, we have found
support for the OTS to carry out further work in identifying
complexity caused as a result of differences between the definition
of income for tax purposes and DWP benefits such as pension
credit.
4.46 Gauging the responses of our Committee members, we
believe this is a matter of medium priority for the next stage
of our review.
H. Small pension pots
4.47 Overall, the OTS has found strong support for further
review of pensioners' access to small pension pots and how they
are taxed.
H.1 Tax reclaims relating to trivial commutation
4.48 The OTS understands that work is ongoing between HMRC
and external parties to review how tax reclaims relating to trivial
commutations can be simplified. The complexities identified from the
initial stages of our review, for example in reclaiming tax via form
P53 for UK resident taxpayers and form R43 for those living overseas,
support the importance of those continuing efforts.
4.49 Indeed, for those living overseas, reviewing form R43
appears to be a matter of priority as it still includes reference to
the first £70 of interest on a NS & I Ordinary Account being
tax exempt1 - a redundant relief previously
identified by the OTS and repealed in paragraph 4 Schedule 26 Finance
Act 2011.
4.50 However, given that others are already working on this
area, the OTS concludes that it should be a low priority area
for the second stage of our pensioner review.
H.2 Further review of the legislation
4.51 Given that we understand work is continuing between HM
Treasury, HMRC and external stakeholders, the OTS suggests that we
may not be able to contribute anything more at this stage. We note
that, acknowledging the potential for higher incidence of them in
future, the DWP is also currently consulting on improving transfers
and dealing with small pension pots2. We therefore
mark this as a low priority for the second stage of our
pensioner taxation review, but add our support to the existing work
to the extent that changes to the rules could achieve
simplification.
2http://www.dwp.gov.uk/consultations/2011/small-pension-pots.shtml
I. Overseas pensions paid to UK residents
I.1 The 10% deduction - review
4.52 Responses from our Committee members indicate that
this is of lesser importance than some other areas when considering
priorities for the second stage of the OTS review.
4.53 Nevertheless, we do believe that this is potentially
an area of increasing importance in the future and, if resources
allow, we would therefore like to devote some further time to it. We
therefore mark it of medium priority.
I.2 Guidance on taxation of overseas pensions - review
4.54 Views from our Committee members were mixed on the
subject of reviewing guidance from HMRC on the UK taxation of
overseas pensions paid to UK residents, including how and when double
tax relief can be claimed. We therefore conclude it should be of
medium priority for the second stage of our review.
J. Collecting tax - Pay As You
Earn
J.1 Eliminate any errors remaining in NPS
4.55 The OTS considers that it is a matter of high
priority for the second stage of our review to gauge whether PAYE
coding accuracy is increased or whether problem areas remain. This
should be identifiable from feedback on the 2012/13 coding run which
is currently taking place.
J.2 A single, reconciled statement to replace multiple P2 Coding
Notices
4.56 Most of our Committee members thought that a single,
reconciled statement of coding should be HMRC's aspiration. We
therefore think it is of high priority for the second stage of
our review to consider this further.
J.3 Payslips for pensioners
4.57 Views from our Committee members were extremely mixed
on whether or not pension providers should be required to issue
regular payslips. Overall, we conclude it is a low priority
for the second stage of our review.
J.4 Starting to receive a pension
4.58 Of most importance to our Committee members in the
area of PAYE was reviewing the regulations to reduce or remove
opportunities to 'dual allowances' situations to
arise. The OTS believes this is a matter that HMRC could address now,
particularly in view of changes to PAYE already in train with the
development of RTI, and we will continue to regard it as a high
priority matter as our work develops.
J.5 Annual reconciliation and tax calculation forms P800
4.59 As P800 tax calculations are now a largely automated
part of the PAYE calendar, we conclude that it is of high
priority to review the complexities caused by them.
Administrative matters such as showing estimated figures and
explaining how the underpayment arose are of high importance.
J.6 Ceasing work in the tax year and claiming a repayment
4.60 As the transition to pension age is becoming
increasingly blurred, the OTS suggests that HMRC reviews the
practical application of form P50 for pensioners and aims to simplify
the process for those claiming a repayment when ceasing to work but
who are perhaps not yet in receipt of pension income. However, the
second stage of the OTS review is unlikely to consider this in detail
and we therefore mark it as low priority for our purposes.
J.7 Determining pensioners’ PAYE codes and form P161
4.61 As noted in Chapter 3, there remains concern that HMRC
changes to the P161 processes could lead to codes being based upon
information that pensioners have not been given the opportunity to
review or check and confusion could still arise.
4.62 We therefore consider that further review of PAYE
administration issues should be a high priority for the second
stage of the OTS pensioner review.
K. Collecting tax - self assessment
K.1 Self assessment – operational improvements
4.63 Easing self assessment processes was a popular area
with our Consultative Committee. The survey results clearly show this
is an area of high priority for the next stage of our
review.
4.64 Although not all of them relevant to only pensioners,
addressing the issues raised in Chapter 3 of this interim report
could provide simplification for that group.
4.65 Disapplying the overriding limit of 50% deductions in
'K code' situations was also noted as a priority
matter, although if PAYE were to be operated on the state pension,
this is likely to be of much lesser importance.
L. Support for bereaved taxpayers
4.66 As noted in Chapter 3, various changes already are in
progress.
4.67 For example, the new processes for the DWP to notify
HMRC of state retirement pensions will include notification of when
there is a change in the amount of payment. This is something that
the OTS understand the current paper P46DWP process does not cover
but the new process should help to ensure that changes in the state
pension following a bereavement will be reviewed and re-coded much
more quickly.
4.68 Also, the R27 form is being improved to include a
prompt to review the tax affairs of the surviving spouse or civil
partner.
4.69 We think improvements in this area are at least of
medium priority but given that work is already under way, the OTS
considers that these matters are of low priority for the
second stage of our review. However, the views of our Consultative
Committee and evidence gathered in preparation of this interim report
serve to reinforce the importance of making real progress in this
area and we therefore hope to keep a watching brief on
developments.
M. National insurance contributions
4.70 National insurance contributions issues were raised on
a limited basis when gathering information for this interim report.
Views of our Committee were also mixed as to its priority in our
review.
4.71 Given that other work is ongoing on the policy
surrounding income tax and national insurance contributions looking
further at administrative simplification, we are marking this as a
low priority for the second stage of our review.
4.72 We would, however, urge that the Government look
carefully at the situation for those reaching retirement,
particularly with further changes to the state retirement age in
progress, and ensure that complexities are minimised so far as
possible.
N. Other administrative issues
4.73 Addressing administrative issues for pensioners rated
as high priority amongst our Consultative Committee, so the
OTS would like to carry out further work in this area in the second
stage of our review.
4.74 This includes reviewing how HMRC interacts with all
pensioners whether b he telephone and face to face, and how
intermediaries are recognised by HMRC in helping them.
N.1 Face to face services, including home visits
4.75 Evidence points to pensioners requiring personalised,
often face to face services, so this is a high priority matter
for us to consider.
N.2 Digital exclusion
4.76 With many pensioners having been left behind by the
online world and the incidence of disabilities potentially affecting
ability to take advantage of technology (at least without extra cost
of additional equipment and software) as people get older, HMRC's
support for pensioners who are digitally excluded is again a high
priority consideration.
O. Gift aid
4.77 The complexities of the gift aid scheme for low-income
pensioners were not widely raised in the initial stages of our
review. Although our Committee members mostly thought that this is an
area the OTS should look at, they rated it as of lesser importance
than other areas. Given also that this is not a matter exclusive to
pensioners, we rate it as low priority for the second stage of
our review.
P. Care and support for employers
4.78 As noted in Chapter 3 of this interim report, although
it is essential that HMRC offers support to older people who have to
engage carers and who may become employers as a result, the OTS
considers that this is a low priority area for the second
stage of our review.
Q. Capital gains tax
4.79 As with gift aid above, the complexities of capital
gains tax (CGT) for pensioners have not come through as being of high
importance thus far in our review. And again, although our Committee
members mostly thought that this is an area the OTS could look at,
our conclusion is that it is a low priority for the second
stage of our review (both in terms of reviewing legislative and
administrative issues).
R. Foreign income, other than pensions – non-UK
domiciled pensioners
4.80 Given that domicile issues have been subject to very
recent consultation and having noted that our Committee members
mostly noted this very low on their priority list, the OTS does
not intend to review this area further.
S. Pensioners retiring abroad
S.1 Administrative problems of living overseas
4.81 The issues discussed in Chapter 3 for pensioners
retiring and living abroad were rated largely as of low
priority by our Consultative Committee. More research might need
to be carried out in order to determine more fully the extent of
complexities in this area and therefore whether it is worth
dedicating further OTS resources to it.
4.82 Therefore, in view of the limitations of our initial
information-gathering work in relation to overseas aspects, the OTS
will remain open to further submissions from pensioners or
organisations which have further examples of complexities and any
ideas for simplification in this area.
A Pensions and pensions tax reliefs:
some historical notes
Pensions
A.1 Pensions have been paid in the UK since at least the
1670s1, though on a rather ad hoc basis. The
rationale has always been the desire to avert poverty in old age and
to ensure that individuals have sufficient income in retirement,
often as a continuing reward for long and faithful service.
1Then and subsequently often by monarchs to
favourites or national heroes and sometimes in perpetuity
A.2 Since the start of the 20th century there
has been a benevolent attitude to pensioners (including measures to
relieve the burden of increased tobacco duty in 1947!) to protect
from taxation those "too old to share in the benefits of higher
earnings and rising standards"2.
2Douglas Houghton MP, Hansard HC Deb 14 June
1961 vol 642 c572
A.3 The Old Age Pensions Act 1908, which was the first step
in the Liberal welfare reforms, introduced the first
"modern" pension from 1 January 1909. This was a means
tested noncontributory benefit of 5/- a week (7/6d for a
married couple) that was paid to those over 70 with an income of less
than £21 a year.
A.4 The first contributory benefits were introduced by the
Widows, Orphans and Old Age Contributory Pensions Act 1925, which
provided that manual workers and others earning less than £250 a
year would receive a pension of 10/- a week from the age of 65. This
was not a universal benefit and it was the Beveridge
Report3 in 1942 that recommended a universal
pension to provide protection against deprivation in old age.
3Sir William Beveridge "Social Insurance
and Allied Services" 1942
A.5 What is currently the basic state pension (BSP) was
introduced from 1948 by the National Insurance Act 1946. It was also
the catalyst for the increase in private earnings related
occupational pension schemes; these had existed prior to World War II
but as the BSP did not match the growth in average earnings in the
post war period occupational pension schemes were more frequently
offered by employers.
A.6 Pensions have further developed since 1948, and
developments have included the introduction of the State Earnings
Related Pensions Scheme (SERPS)4 between 6 April
1978 and 5 April 2002, which was replaced by the Second State Pension
(S2P)5
4Social Security Act 1975
5Child Support, Pensions and Social Security
Act 2000
Taxation of pensions
A.7 Pensions have been the subject of taxation in the UK
for centuries. The Land Tax introduced in 1692 taxed "any
Pension Annuity Stipend or other yearly Payment ..." at the rate
of "Three Shillings for every Twenty Shillings ...", and
pensions were specifically the subject of taxation in the Income Tax
Acts 1799 and 18036, and have remained so ever
since7.
6S175
7Except between 1816 and 1842 when there was
no income tax
A.8 The subsequent history and development of the taxation
of pensions is complex and only a broad outline of the current
position is set out below.
UK pensions (not state retirement pensions)
A.9 All UK pensions arising from past employment or paid by
a registered pension scheme are pension income and charged under Part
9 Income Tax (Earning and Pensions) Act 2003 (ITEPA 2003). The charge
is on the amount "accruing" in the tax year irrespective of
when paid.
A.10 Pensions arising from past employment or paid by a
registered pension scheme count as "PAYE income" and as
"PAYE pension income"8 unless they fall
into an excluded category (e.g. annuities for
dependants9).
8Section 683(1)(b) ITEPA 2003
9Section 609 ITEPA 2003
Overseas pensions paid to UK residents
A.11 Until 1974, individuals were taxed on overseas
pensions on the remittance basis whatever their place of domicile. In
1974 the remittance basis was limited to non-domiciled persons, and
overseas pensions were brought into line with other income. Section
22 FA 1974 provided for a 10% deduction from pensions charged under
Schedule D Case V and Schedule E (the latter being pensions payable
in the UK from a foreign government).
A.12 ITEPA 2003 brought all overseas pensions into Part 9
but maintained a distinction between those formerly within Schedule D
(Chapter 4 of Part 9) and those formerly within paragraph 4 of
Schedule E (Chapter 11 of Part 9). Chapter 4 charges the "full
amount arising" in the tax year (paradoxically this means 90% of
the actual amount) and Chapter 11 charges the full amount accruing
before allowing a 10% deduction. There are specific rules determining
whether a credit for foreign tax is due.
State pensions
A.13 The old age pension that was paid up until 1946 was
subject to a means test. Since the exemption for small incomes was
always higher than the aggregate of the annual pension and other
taxable income they were never chargeable to tax, although in theory
they were within the scope of income tax.
A.14 In 1946 the National Insurance based state retirement
pension (NIRP) was introduced, which was specifically made taxable
under Schedule E10 and was also deemed to be
emoluments11. It was not subject to PAYE, though
the legal basis for this is obscure. However since 2003 all state
pension income is outside PAYE by virtue of regulation 4(1)(b) of the
PAYE Regulations (with an exception for lump sum payments of deferred
pension). Those regulations do, however, require state pensions to be
coded out where there is another source of PAYE income.
10Section 27(2) FA 1946
11Section 24 FA 1949
Pensions (of all types) paid to non-residents
A.15 Many non-residents receiving pensions from UK-based
payers are those who have emigrated since retirement and are in
principle liable to UK income tax on UK source income subject to
certain exclusions12, e.g. UK social security
pensions13.
12Chapter 1 part 14 ITA 2007
13Section 813 ITA 2007
A.16 Consequently a non-resident pensioner may be liable to
UK tax on an occupational pension paid from the UK unless a double
tax agreement exempts it from UK tax. A non-resident may be entitled
to personal allowances, including age-related allowance and married
couple's allowance.
Age-related Allowances
A.17 Reductions in liability from the "standard"
rate of income tax have been a feature of income tax since at least
1803. Starting in 1925/26 reliefs related to age have been
introduced. These are:
- Old age relief14;
- Age exemption15; and
- Age allowance16
14Section 15 FA 1925
15Section 13 FA 1957
16Section 31 F(2)A 1975
A.18 The 1925 old age relief was introduced to help those
over 64 on small incomes (less than £500 a year) and was given
instead of earned income relief. The justification for age relief was
given by the Chancellor, Winston Churchill:
Box A.1:
"I consider that the savings of old people on
a small scale are virtually earned income, and, therefore, a
person over 65, whose total income from investments or any
other source does not exceed £500 a year will gain the
advantage ..."17
|
17Hansard: HC Deb 28 April 1925 vol 183
cc86-9
A.19 Age relief was repealed in 1972/73 by FA 1971.
A.20 An age exemption was introduced alongside the age
relief by section 13 FA 1957 to provide an exemption from income tax
for a single person with income less than £250 (£400 for a
married couple).This was replaced in 1975 by age allowance, designed
to end the position where when "an elderly person's income
exceeds the age exemption limit, the benefit of the higher starting
point begins to be withdrawn immediately."
18
18Denis Healey, Hansard: HC Deb 12 November
1974 vol 881 cc273-5
A.21 A differential age allowance was introduced in 1987
(section 26 FA 1987), which provided for an increased allowance if
the taxpayer, or one of a couple, was 80 or over (reduced to 75 in FA
1989).
A.22 During the period in question there was clear support
in Parliament for maintaining the various age reliefs, even if it was
not considered appropriate to increase the thresholds. Until 1971, a
Parliamentary debate focussed on extending age relief. When it was
introduced in 1925 the retirement age for men and women was 65.
During World War II the retirement age for women was reduced to 60,
but age relief continued to apply from age 65. From 1945 there were
various Finance Bill amendments to amend the age relief to apply to
women at age 60 but these were rejected.
A.23 From 1990/1991 the system of personal allowances was
changed to recognise independent taxation of wives' income. A new
married couple's allowance (MCA) applied to married men of
whatever age, with those over 65 and 75 entitled to an enhanced
amount. The MCA was transferrable to the wife if the husband could
not use it19. In 1992 an election was introduced
for either spouse to use half (with the other half going to the other
spouse) or all of the allowance and in FA 1994 it was changed to
become a tax reduction at the rate of 20%. In FA
199920 the MCA became a transferable tax allowance
available to those born before 6 April 1935 and the rate was reduced
to 10%.
19Section 257 ICTA 1988
20Section 31 FA 1999
A.24 For those born before 6 April 1935 making maintenance
payments to a former spouse there is a further allowance giving a tax
reduction of 10% for payments of £244 or
less21.
21Chapter 5 Part 8 ITA 2007
The operation of PAYE
A.25 PAYE was introduced in 194422 when
the majority of employees worked for a single employer and
occupational pensions were paid to people who had fully retired and
before the introduction of national insurance contribution-based
state retirement pensions.
22By the Income Tax (Employments) Acts 1943
and 1944 and regulations including Income Tax (Employments)
Regulations 1944 (S. R. & O. 1944, No. 251) ("the 1944
Regulations").
A.26 From 1944 to the introduction of self assessment in
1995, the successive Pay As You Earn Regulations and the (then)
Inland Revenue's procedures appeared to cater adequately for a
pensioner who starts a job or receives a second pension. Assuming all
allowances were given against the primary pension, standard or,
later, basic rate tax would be deducted from the second source.
A.27 Any overpayment or underpayment would normally be
dealt with by assessment leading to either payment or recoding,
though there were some "informal procedures". Most
employees including occupational pensioners (but excluding those with
no tax liability) were likely to be issued with a return, annually or
less frequently, depending on the complexity of the person's
affairs. If the individual did not make a return, the Inland Revenue
would issue a form seeking information, mainly about allowances, to
enable a correct coding to be ascertained.
A.28 The operation of PAYE in 2011 is governed by the
Income Tax (Pay as You Earn) Regulations 2003 (SI 2003/2682).
B International comparisons
B.1 The OTS carried out some international comparisons as
part of its research in preparation of this interim report. We give
the results thus far in a table below, but have not as yet used these
to make detailed comparisons with the UK system.
Table 4.B: Table
|
Question
|
India
|
Japan
|
Norway
|
Germany
|
Netherlands
|
United
States
|
Australia
|
Canada
|
Ireland
|
1
|
Does every individual have to file a tax return (a) in
every case or (b) only if their income is above a certain
limit?
|
File return if one of 6 conditions is met (e.g. own
vehicle, occupy specific floor area of immoveable
property.
|
SA but not all file tax returns as tax is withheld by
employers. Full return if various conditions apply (e.g.
annual income > ¥20m). Tax on pensions generally
withheld at source but return required if insufficient has
been withheld or additional income (e.g. dividends)
received.
|
Yes if taxable income or wealth. Pensioners with little
income or wealth may be exempt.
|
No e.g. Single assessed taxpayers with income subject to
withholding tax.
|
No
|
A U.S. citizen or resident who is 65 or older, must file a
return if gross income for the year is > the minimum
threshold for filing status. The threshold is higher than for
taxpayers < 65, and under some circumstances social
security income can be either partly/completely excluded. If
the only income received was social security, those benefits
may not be taxable and the taxpayer does not have to file a
return.
|
(a) No (b) yes if you had any income paid under deduction
of tax, or received a "senior offset" or pensions
and income exceeded a given figure. Non-filers must notify
that they are not filing.
|
(a) no (b) yes if they are liable to tax in the year or
pension income is split between spouses.
|
(a) No (b) a PAYE employee with untaxed income above a
certain limit must file a self-assessment return.
|
2
|
What is the state retirement age or entitlement age for
pension?
|
Typically 58 - 60 (employer's choice) but some
positions required to work to 80. Central government
employees retire at 60, state government varies locally.
|
65
|
Early retirement age 62/ normal retirement age 67.
|
Early retirement age 65/ normal retirement age 67.
|
Early retirement age 60/ normal retirement age 65.
|
Retirement can be any time between 62 (early retirement)
and full retirement age (depends on year of birth but for
2011 65). Early retirement may result in reduced monthly
benefits from social security.
|
65 for men, 60 for women in the process of increasing to
65 by 2013.
|
For old age security pension and supplementary Canadian
pension Plan (CPP) 65, but for CPP can be 60 if you retire,
with 60 becoming norm in 2012.
|
65 for "Transitional State Pension" then
eligible instead for "State Pension Contributory"
at 66 rising to 68 in 2028.
|
3
|
How is old person/ senior citizen defined?
|
Senior citizen ≥ 60/ very senior citizen ≥
80)
|
|
|
No
|
|
Older Americans/ seniors ≥ 65
|
As in 2.
|
60 +
|
varies
|
4
|
4. Are there different tax rates depending on age (local/
national)? Do they apply to all types of income or only
certain types e.g. savings?
|
Resident senior citizens - 0% up to Rs250k, 10% on excess
over Rs250k and up to Rs500k, Rs25k plus 20% over Rs500k,
Rs85k plus 30% over Rs800k.
Very senior citizen - 0% up to Rs500k, 205 0n excess over Rs
500k, and 60k plus 30% over Rs 800k.
|
Does not appear to be the case. Generally income tax paid
on national, prefectural and municipal levels.
|
|
|
Reduced rates for those over 65.
|
Tax rates depend on income level and not age. Income
threshold for seniors is higher and there is a higher
standard deduction.
|
No
|
No
|
No
|
5
|
5. Are there different tax rates on pensions of any
kind?
|
Paying branch is responsible for deducting tax at source
from pension payments and allows deducting on account of
relief for eligible savings.
|
|
For 2010 3% tax on pension income.
|
From 1.1.05 - new rules for old age pension (Alterseinkun
ftegesetz) - pension from statutory pension insurance carried
over to full taxation. Specific rules also apply to social
security pensions on the basis of contributory periods of
employment in ghetto.
|
|
Private pensions fully/ partly/ not taxed depending on the
taxpayer's contribution to the fund and the nature of the
payments.
|
Most pensions and annuities are reduced for tax purposes
by a deduction similar to that for purchased life annuities
in the UK.
|
Some pension income may by election be split between
spouses which may reduce tax.
|
Lump sums on retirement are exempt up to a limit, and
relief may be given for "Standard Capital Superannuation
benefit".
|
6
|
6. Are there different tax allowances dependent on
age?
|
|
Certain medical expenses provided by facility for the
elderly. Some exemption for the disabled where the individual
is >65 and other conditions apply.
|
Special tax allowances for pensioners.
|
|
|
Yes - social security benefits for some seniors may be
partly taxed or not taxed at all. Higher standard deduction
for seniors.
|
Yes - Senior Australian Tax Offset (SATO) is available to
persons of state pension age not in prison. Offset is income
limited with a taper (shade-out). There is also a
"pensioner rebate" (PTO) payable to those outside
SATO. SATO & PTO are transferable to spouses if in excess
of income. An employee over 55 is also entitled to a
"Mature Worker Wage Offset".
|
Yes - "Age amount" is due if over 65. It is
income limited and tapered. For those under 65 and receiving
occupational pension, "pension amount" may be
due.
|
Person over 65 can claim exemption if total income is
<€18000 (single) €36000 (couple). Marginal
relief above that Age Tax Credit €245 given (doubled
for married couples) Tax relief of up to 5% of the
covenantor's total income is available on a deed of
covenant in favour of a person aged 65 and
over. 55 or over qualify for a higher relief on
rent paid for private accommodation Exemptions for over 55s -
retirement eligible for capital gains tax.
|
7
|
Are there any specific/ increased tax deductions for old
people e.g. healthcare?
|
R20k for medical insurance premium for senior/ very senior
citizens (Rs15k otherwise).
|
|
|
|
|
For seniors Medicare (state medical benefit) is not
included in gross income. Certain welfare benefits, veteran
benefits, food and housing benefits are also excluded.
|
|
No
|
No
|
8
|
Is there a state pension?
|
New Pension Scheme from 1.1.10 widened to all citizens on
a voluntary
basis (previously just for public sector employees). No
state pension system other than means tested
national assistance.
|
Yes
|
|
State pension scheme is partnership between employers,
employees and state.
|
Yes by virtue of Algeme Ouderdans Wet (general seniority
law).
|
Yes - social security is national state pensions payable
to eligible US citizens and residents over 62.
|
Yes - age pension payable at 65 for men, increasing to 65
by 2013 for women.
|
Yes
|
Yes
|
9
|
Are pensions from the state taxed? Are overseas state
pensions taxed?
|
Pensions earned in India are taxed in India. Pensions from
overseas are income accruing to pensioners abroad and not
liable to tax in India on accruals basis. If remitted to
India they are not taxable on receipts basis (taxed in India
if recipient is R and OR in India). If agreement with
employer that pensions received directly in India taxed on
receipts basis.
|
Tax is generally withheld from pensions, Requirement to
file if a pension is received from overseas and no tax
withheld.
|
|
|
|
Social security benefits may be non- taxable or partially
taxable depending on total other income. Taxable amount of a
foreign pension is in general the gross distribution less the
cost (investment in the contract) - as for domestic pensions.
Only pension eligible for exclusion from taxable income is
one allowed under DTA.
|
Yes & yes (subject to DTA).
|
Yes & yes
(subject
to DTA).
|
Yes & yes (subject to DTA).
|
10
|
Are there repayable tax credits e.g. For dividends (where
there is an imputation
system)?
|
|
|
|
|
|
No
|
Yes - excess imputation credits (above tax liability) are
refundable.
|
No
|
No
|
11
|
Is online filing mandatory and are there any exceptions
for older people?
|
Not mandatory.
|
Not mandatory.
|
Not mandatory.
|
Not mandatory.
|
Mandatory by taxpayer or adviser.
|
Individual taxpayers may file in paper or
electronically.
|
No - Individual taxpayers may file on paper or
electronically .
|
No - Individual taxpayers may file on paper, by phone or
electronic ally.
|
No - SA returns must be filed online if they contain
certain type of income.
|
12
|
Are tax returns pre- populated, e.g. by including state
pension amounts?
|
|
|
Some e.g. With information from employer.
|
|
|
No
|
Being introduced from July 2011.
|
No
|
No
|
13
|
Any other issues?
|
|
|
Basic principle is everyone pays according to their means
and receives services according to their needs.
|
|
|
|
Withholding tax applies to all pensions including state
pensions.
|
Withholding tax applies to all pensions including state
pensions.
|
State pensions are taxed as in UK - as coding deduction or
through SA "R85" procedure only available to over
65s.
|
C List of common HMRC forms for pensioners
C.1 This list of forms covers items that pensioners
encounter and may have to complete. It does not cover other forms
which pension payers have to deal with (the P46(PEN), for example),
nor does it cover other information-giving forms that the pensioner
might receive, such as their P60 from employers and pension
providers.
Table 4.C: Table
|
Form
reference
|
Form
title
|
Date last
updated, if known
|
Purpose
|
Hyperlink (if available
online)
|
|
Pensioner-specific forms
|
1.
|
Form 18
|
Transferring the married couple's allowance
|
10/05
|
Form 18 requests a change in the way the minimum amount of
married couple's allowance is divided between the
taxpayer and his or her spouse or civil partner
|
http://www.hmrc.gov.uk/forms/18.pdf
|
2.
|
Form 575
|
Notice of transfer of surplus income tax allowances
|
11/10
|
Form 575 is used to transfer any unused married
couple's allowance to the taxpayer's spouse or civil
partner (it also covers transfer of surplus blind
person's allowance).
|
http://www.hmrc.gov.uk/forms/575-t-man.pdf
|
3.
|
P53
|
|
|
Claiming tax back on trivial commutation pension lump
sum
|
Not available online
|
4.
|
P161
|
Pension coding form
|
07/10
(NB, currently under review)
|
When approaching state pension age or for women
approaching age 65, the taxpayer uses form P161 to tell HMRC
about their income. It also serves as a claim to
agerelated tax allowances.
|
http://www.hmrc.gov.uk/forms/p161-man.pdf
|
5.
|
P161(W)
|
Bereavement benefit coding form
|
07/10
|
If a taxpayer is receiving a bereavement benefit or their
spouse or civil partner has died, they use form P161
bereavement benefit coding to tell HMRC about any changes to
their income because of their bereavement.
|
http://www.hmrc.gov.uk/forms/p161w-man.pdf
|
6.
|
P800
|
Tax calculation
|
|
Tax calculation, usually sent to the taxpayer to show that
there has been an underpayment or overpayment of tax.
|
Not available online
|
|
General
taxpayer forms, but which might be used by pensioners
|
7.
|
DT-Individual
|
Double taxation treaty relief, application for relief at
source from UK income tax and claim to repayment of UK income
tax.
|
07/11
|
For use by an individual resident of a country with which
the UK has a double taxation treaty that provides for relief
from UK income tax on pensions, purchased annuities, interest
or royalties arising in the UK.
|
http://www.hmrc.gov.uk/cnr/dtindividual.pdf
|
8.
|
P2
|
PAYE coding notice
|
03/09
|
Notice to taxpayer of PAYE code to be applied to a
particular source of employment or pension income.
|
Not available online
|
9.
|
P50
|
Claim for repayment of tax when you have stopped
working.
|
|
Claim to repayment of PAYE before the end of the tax year.
In a pensioner context, one of its uses is where the taxpayer
has retired permanently and is not receiving a pension from
their former employer.
|
http://www.hmrc.gov.uk/pdfs/p50.pdf
|
10.
|
P85
|
Leaving the UK - getting your tax right.
|
02/11
|
If the taxpayer has left or is about to leave the UK, they
use form P85 to claim tax relief or any tax refund they are
owed and to inform HMRC of any UK income they continue to
receive. (Not to be used if the taxpayer is already required
to complete a self assessment tax return).
|
http://www.hmrc.gov.uk/cnr/p85.pdf
|
11.
|
R27
|
Potential repayment to the estate.
|
01/08
|
Form to finalise the income tax position of a deceased
taxpayer up to their date of death (mainly aiming to
ascertain whether a repayment is due).
|
http://www.hmrc.gov.uk/forms/r27.pdf
|
12.
|
R38
|
Tax claim
|
07/05
|
To claim a tax refund, or nominate someone else to receive
your refund.
|
http://www.hmrc.gov.uk/forms/r38.pdf
|
13.
|
R40
|
Claim for repayment of tax deducted from savings and
investments
|
10/10
|
Used to claim back tax if too much tax has been paid on
savings interest.
|
http://www.hmrc.gov.uk/forms/r40.pdf
|
14.
|
R43
|
Claim to personal allowances and tax repayment by an
individual not resident in the UK
|
02/11
|
Can be used in a pensioner context to claim age-related
and married couple's allowances, and for example to claim
a tax refund on tax over-deducted on a trivial commutation
payment.
|
http://www.hmrc.gov.uk/cnr/r43-2011.pdf
|
15.
|
R85
|
Getting your interest without tax taken off
|
04/11
|
Taxpayers use form R85 to tell their bank or building
society that they qualify for tax-free interest on their
account (because they are a non-taxpayer).
|
http://www.hmrc.gov.uk/forms/r85.pdf
|
16.
|
R86
|
Application to receive a joint annuity without tax taken
off
|
10/09
|
Used to request that a joint annuity be paid without tax
first being taken off. This involves both recipients of the
annuity declaring that they are resident in the UK,
contributed equally to the cost of the annuity, are entitled
to a half share each of the annuity payments, and are
unlikely to have to pay income tax on their total income in
the current tax year.
|
http://www.hmrc.gov.uk/forms/r86.pdf
|
17.
|
R89
|
Application to receive an annuity without tax taken
off
|
10/09
|
If the taxpayer is in receipt of a purchased life annuity
(PLA), they can use form R89 to request that it be paid
without tax taken off if they are resident in the UK and
unlikely to have to pay income tax in the current tax
year.
|
http://www.hmrc.gov.uk/forms/r89.pdf
|
18.
|
R105
|
Application for a not ordinary resident saver to receive
interest without tax taken off
|
08/06
|
If the taxpayer does not normally live in the UK, they can
use form R105 to apply for tax- free interest from their bank
or building society.
|
http://www.hmrc.gov.uk/forms/r105.pdf
|
19.
|
SA100
|
Self assessment tax return
|
12/10
|
Full tax return, or taxpayer can use online system or
third party software
Various supplementary pages might also need to be completed,
depending on the taxpayer's affairs. In particular,
married couple's allowance has to be claimed on the
additional information pages, SA101.
|
http://www.hmrc.gov.uk/forms/sa100.pdf
and
http://www.hmrc.gov.uk/forms/sa101.pdf
|
20.
|
SA200
|
Short tax return
|
For 2010/11 tax year
|
The SA200 short self assessment tax return is only used
when HMRC issues one. It cannot be downloaded or ordered
online.
|
Not available online
|
D The pensioner population in the UK
D.1 HMRC provided the OTS with a summary of various
pensioner research and data from their archives and external sources,
extracts from which are reproduced below:
Box D.1: Some basic information
- number of pensioners* (midyear 2011 est.):
12,178,000;
- number in employment (2009): 1,383,000;
- 5.57 million people of state pension age pay tax, 1.55
million of these are in self assessment;
- 30% of pensioners between state pension age and four
years after have a job;
- the median expected income for the first year of
retirement lies between £10,000 and £11,999;
and
- approximately 3.5 million older people live alone.
*HMRC data is based upon state retirement age. The 2011
figures take account of planned changes in retirement
age.
|
Box D.2: Issues affecting pensioners
Forty per cent of those aged 65-74 in the UK have a
disability or limiting long-standing illness.
Many older people have levels of literacy (23%) and numeracy
(53%) below those expected of school leavers.
Quoting the DWP's Attitudes to Pensions: The 2009 Survey,
HMRC has told us that '37% of respondents were not aware
of any rules about pensions and tax' and 'less than
half (41%) were aware that pension income is subject to tax
like regular income' and that 'there is a drop in
confidence (28% very confident to 21% very confident) about
tax knowledge between the run up to the state pension age and
immediately after'.
|
D.2 HMRC has offered the following insights into
pensioners' dealings with HMRC, quoting from various research
they have carried out:
Box D.3: Dealings with HMRC
When dealing with HMRC, 27% of pre-pensioners accessed the HMRC
website to try and resolve their query. Compared to 22% of
transitional pensioners and just 12% of pensioners. Contrast
this with 32% across the general population. (August 2010
figures)
In 2010/11, only 65% felt HMRC provided a service with them in
mind compared to 70% across the whole population. Only 66%
viewed HMRC as good at getting things right compared to 72% for
all individuals.
Also in 2010/11 when asked about how straightforward their
recent dealings with HMRC were only 73% of those aged 60+ rated
it as straightforward compared to 80% aged 40-49 years and 81%
aged 30-39 years.
When first making contact with HMRC 72% of pensioners will
contact via telephone compared to just 2% who would use the
internet. 20% would first make contact by post.
Pensioners have higher expectations and want a personalised
service. |
D.3 The following estimates have been prepared with the
latest available HMRC data set which is the 2007-08 survey of
personal incomes projected to 2011-12.
2011-12:
Taxpayers in receipt of state and/or private pension. (All
figures are in '000)
|
2011-12:
Taxpayers in receipt of state pension (may also have private
pension)
|
2011-12:
Taxpayers in receipt of private pension (may also have state
pension)
|
Age Ranges
|
SA
|
PAYE Only
|
Claims
|
Totals
|
Age Ranges
|
SA
|
PAYE
Only
|
Claims
|
Totals
|
Age Ranges
|
SA
|
PAYE
Only
|
Claims
|
Totals
|
Under 40
|
4
|
29
|
..
|
34
|
Under 40
|
-
|
-
|
-
|
-
|
Under 40
|
4
|
29
|
..
|
33
|
40-44
|
10
|
34
|
..
|
43
|
40-44
|
-
|
-
|
-
|
-
|
40-44
|
10
|
34
|
..
|
43
|
45-49
|
20
|
60
|
..
|
80
|
45-49
|
-
|
-
|
-
|
-
|
45-49
|
20
|
60
|
..
|
80
|
50-54
|
68
|
200
|
..
|
269
|
50-54
|
-
|
-
|
-
|
-
|
50-54
|
68
|
200
|
..
|
269
|
55-59
|
175
|
417
|
..
|
592
|
55-59
|
-
|
-
|
-
|
-
|
55-59
|
175
|
417
|
..
|
592
|
60-64
|
493
|
1,140
|
7
|
1,640
|
60-64
|
177
|
550
|
6
|
730
|
60-64
|
425
|
1,000
|
..
|
1,420
|
65-69
|
503
|
1,060
|
5
|
1,560
|
65-69
|
485
|
1,030
|
5
|
1,520
|
65-69
|
418
|
980
|
..
|
1,400
|
70-74
|
350
|
963
|
9
|
1,320
|
70-74
|
349
|
956
|
9
|
1,310
|
70-74
|
303
|
931
|
2
|
1,240
|
75-79
|
231
|
654
|
10
|
895
|
75-79
|
230
|
649
|
10
|
889
|
75-79
|
206
|
639
|
3
|
848
|
80 and Over
|
243
|
690
|
20
|
953
|
80 and Over
|
241
|
683
|
20
|
944
|
80 and Over
|
209
|
676
|
6
|
890
|
Totals
|
2,100
|
5,240
|
51
|
7,390
|
Totals
|
1,482
|
3,870
|
50
|
5,400
|
Totals
|
1,839
|
4,960
|
10
|
6,810
|
D.4 The table below is the population of the UK of age 65
and older1
Age
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
2011
|
65
|
562,885
|
546,054
|
547,552
|
590,692
|
629,213
|
644,994
|
652,078
|
66
|
557,270
|
554,315
|
537,960
|
540,446
|
583,682
|
622,106
|
633,010
|
67
|
544,572
|
548,059
|
545,233
|
530,182
|
533,442
|
576,346
|
610,195
|
68
|
527,661
|
534,863
|
538,513
|
536,807
|
522,667
|
526,146
|
565,493
|
69
|
509,271
|
517,550
|
524,812
|
529,229
|
528,346
|
514,775
|
516,582
|
70
|
487,975
|
499,017
|
507,466
|
515,088
|
519,980
|
519,416
|
505,860
|
71
|
472,170
|
476,972
|
488,090
|
497,245
|
505,202
|
510,341
|
510,531
|
72
|
466,247
|
460,457
|
465,389
|
477,438
|
486,761
|
494,762
|
500,762
|
73
|
460,678
|
453,548
|
448,198
|
454,146
|
466,244
|
475,709
|
484,260
|
74
|
448,080
|
446,766
|
440,189
|
436,294
|
442,290
|
454,434
|
464,330
|
75
|
427,656
|
433,321
|
432,380
|
427,105
|
423,664
|
429,960
|
442,544
|
76
|
403,594
|
411,791
|
417,843
|
417,861
|
413,196
|
410,392
|
417,526
|
77
|
385,373
|
387,056
|
395,502
|
402,316
|
402,756
|
398,693
|
397,033
|
78
|
371,301
|
367,699
|
369,936
|
378,973
|
386,034
|
387,237
|
383,956
|
79
|
351,498
|
352,578
|
349,936
|
352,763
|
361,850
|
369,268
|
370,763
|
80
|
330,128
|
332,196
|
333,770
|
331,691
|
334,811
|
344,164
|
351,595
|
81
|
309,670
|
309,728
|
312,460
|
314,585
|
312,750
|
316,240
|
325,928
|
82
|
295,389
|
288,584
|
289,213
|
292,286
|
294,714
|
293,722
|
297,862
|
83
|
285,606
|
273,199
|
267,585
|
268,575
|
271,942
|
275,026
|
274,651
|
84
|
265,626
|
261,927
|
251,034
|
246,318
|
247,538
|
251,424
|
254,803
|
85
|
211,420
|
240,800
|
238,533
|
228,773
|
224,672
|
226,540
|
231,321
|
86
|
154,128
|
190,543
|
216,700
|
215,359
|
206,635
|
203,480
|
207,291
|
87
|
130,453
|
137,806
|
170,200
|
193,201
|
192,618
|
184,966
|
184,827
|
88
|
121,830
|
113,997
|
122,305
|
150,523
|
169,858
|
170,716
|
166,194
|
89
|
110,906
|
104,744
|
98,704
|
107,512
|
131,519
|
147,892
|
150,646
|
90
|
|
|
|
|
92,420
|
|
128,346
|
91
|
|
|
|
|
74,039
|
|
96,498
|
92
|
|
|
|
|
63,833
|
|
67,231
|
93
|
|
|
|
|
53,490
|
|
49,835
|
94
|
|
|
|
|
42,601
|
|
40,031
|
95
|
|
|
|
|
32,062
|
|
31,776
|
96
|
|
|
|
|
23,099
|
|
23,913
|
97
|
|
|
|
|
16,120
|
|
17,057
|
98
|
|
|
|
|
10,960
|
|
11,656
|
99
|
|
|
|
|
7,289
|
|
7,714
|
100
|
|
|
|
|
4,672
|
|
4,977
|
101
|
|
|
|
|
2,831
|
|
3,108
|
102
|
|
|
|
|
1,649
|
|
1,850
|
103
|
|
|
|
|
936
|
|
1,047
|
104
|
|
|
|
|
508
|
|
560
|
105
|
|
|
|
|
263
|
|
283
|
106
|
|
|
|
|
132
|
|
136
|
107
|
|
|
|
|
67
|
|
62
|
108
|
|
|
|
|
33
|
|
28
|
109
|
|
|
|
|
16
|
|
11
|
Total
|
9,191,387
|
9,243,570
|
9,309,503
|
9,435,408
|
10,019,404
|
9,748,749
|
10,386,160
|
1Eurostats
E The evidence gathering process
E.1 During the last quarter of 2011, the OTS held
meetings with various stakeholders in a variety of locations, as
listed in table 1 below, to discuss possible issues to consider as
part of the review of pensioner taxation. As part of this
consultation process, the OTS has travelled to Scotland, Wales and
Northern Ireland, and also across England. In so doing, we have heard
the views of many advisers to pensioners, both from the voluntary
sector and those acting on a professional basis, as well as from
Government.
E.2 The OTS is grateful to the various individuals and
organisations that have taken the time to contribute.
E.3 Due to the tight timescales involved between commencing
our review and producing this interim report, we acknowledge that we
have not met with as many individual pensioners as we would have
liked. In the next stage of our review, we will aim to gauge more of
their experiences and views first hand, perhaps through a research
project.
E.4 That is not to say that we have not heard from
pensioners direct. Articles have been posted in many publications
targeted at older people, for example SAGA magazine, the Civil
Service Retirement Fellowship newsletter, The National Federation of
Occupational Pensioners' newsletter and Tax Help for Older
People's Tax Tips Corner. With the help of this coverage, we have
received a number of emails from pensioners.
E.5 The general press has also covered the review. Early on
in our information-gathering process, we received in excess of 700
letters from pensioners as a result of an article in the Daily Mail.
As well as views on the complexity of pensioner taxation, that post
bag contained a number of letters from low-income pensioners who
needed help with their tax affairs. We give special thanks to Tax
Help for Older People for contacting those people to offer support.
We are also grateful to Citizens Advice for providing us with
evidence of complexities faced by pensioners.
E.6 The independence of the OTS, and the willingness of
pensioners and their advisers to engage with our work, has been
complemented by the knowledge held within government. In particular,
the OTS has drawn on specialists within HM Treasury, HMRC and the
Department for Work and Pensions. While our focus has been on tax
simplification, inevitably our review has identified issues which
cross over to other areas of Government, such as welfare benefits for
pensioners. Also, in a number of areas, the OTS has drawn on the
analytical resources within HMRC and acknowledges the help that has
been provided from within HMRC.
E.7 The Consultative Committee of the review of pensioner
tax was put in place to act as a sounding board for the work of the
OTS. The OTS has engaged the Committee throughout this review, and
the active involvement of the Committee members has been invaluable.
However, this report sets out the view of the OTS and not of the
Committee. The full list of Consultative Committee members is set out
in table 2 and the OTS would once again wish to thank them for their
time and contributions.
Table E.1: Meetings held by the OTS
review of pensioners’ taxation
Venue
|
Organisation
|
England
|
|
Non-government meetings
|
|
Dorset
|
Tax Help for Older People, head office
|
Portsmouth
|
HMRC contact centre
|
London
|
Age UK
|
London
|
Citizens Advice
|
Solihull
|
Tax Help for Older People, pensioner surgery
|
London
|
Tax Aid
|
London
|
Paul Lewis of BBC Moneybox
|
London
|
Civil Service Pensions Association
|
London
|
National Association of Pension Funds
|
New Malden, Surrey
|
Discussion group, involving the tax agent community
|
Preston
|
Discussion group, involving the tax agent community
|
Government meetings
|
London
|
Department for Work and Pensions
|
London
|
HMRC, policy, demand management and data experts
|
London
|
HM Treasury, policy
|
Northern
Ireland
|
Non-government meetings
|
Belfast
|
Advice NI
|
Belfast
|
Age NI
|
Belfast
|
Age Sector Platform
|
Belfast
|
Access to Benefits
|
Belfast
|
Chartered Institute of Taxation, NI Branch meeting
|
Scotland
|
Non-government meetings
|
East Kilbride
|
Tax Help for Older People, regional co-ordinator
|
Government meetings
|
East Kilbride
|
HMRC contact centre
|
Wales
|
Non-government meetings
|
Cardiff
|
Tax Help for Older People, regional co-ordinator and
advisers
|
Government meetings
|
Cardiff
|
HMRC contact centre
|
Table 4.D: Members of the review of
pensioners taxation Consultative Committee
Name
|
Organisation
|
Bob Harris
|
ICAS and McLellan Harris & Co
|
Ciaran Arthurs
|
Advice NI
|
Graham Sherburn
|
Tax Help for Older People
|
Jane Moore
|
Institute of Chartered Accountants in England and
Wales
|
Karen Thomson
|
Chartered Institute of Payroll Professionals
|
Mary Pattison
|
Department for Work and Pensions
|
Matthew Stephens
|
Prudential
|
Mike Warburton
|
Grant Thornton
|
Paddy Millard
|
Low Incomes Tax Reform Group and Tax Help for Older
People
|
Peter Holland
|
HM Revenue and Customs
|
Roger Turner
|
The National Federation of Occupational Pensioners
|
Ruth Hopkinson
|
HM Treasury
|
Sally Ferguson
|
Tax practitioner
|
Sally West
|
Age UK
|