Written Ministerial Statement, 23 January 2013
The Exchequer Secretary to the Treasury (Mr David Gauke):
The Government launched the Office of Tax Simplification (OTS) in
July 2010 to provide independent advice on simplifying the tax
system.
The OTS has today published the final report of its review of the
taxation of pensioners, commissioned by the Government on 5 July
2011. (See www.hm-treasury.gov.uk/d/ots_final_review_pensioner_taxation_230113.pdf)
The Government asked the OTS to carry out a two stage review of
pensioner taxation. The first stage of the review looked at the
administrative and legislative complexities faced by pensioners and
suggested key areas for further review. This was completed in March
2012 and the Government gave its response at Budget 2012.
The OTS has now completed the second stage of its review, focused
on the key areas suggested in the first stage. The Government will
make its response to this report at the appropriate time.
Electronic copies of the report have been placed in the Libraries
of the House.
HM Treasury
23 January 2013
___________________________________________
Office of Tax Simplification review of pensioners' taxation:
final report
January 2013
Contents
Foreword
Executive summary
Chapter 1 Introduction
Chapter 2 List of recommendations
Chapter 3 The wider pensioner tax context
Chapter 4 Making life easier for pensioners – administrative
improvements
Chapter 5 Policy recommendations
Annex A Interim report – priorities and suggestions
Annex B Analysis and provisional costing assessments from HMRC and
the DWP
Annex C The OTS review of pensioner taxation
Foreword
For most people, during their working lifetime, tax payments have
effectively been on “autopilot”. They have benefitted
from being a part of the “Pay as You Earn” (PAYE) system.
This has meant that a combination of HM Revenue & Customs (HMRC)
and employers have ensured that on each pay day, an employee has paid
broadly the right amount of tax. If a person has been a higher rate
taxpayer the benefits of PAYE have still applied.
Where savings and investment income are involved, most basic rate
taxpayers find that a simple deduction of tax has been made at source
and so no further action is required. For those on higher rates of
tax, liabilities in this area are, in the main, sorted out via the
annual self assessment return or through coding adjustments.
However, when someone decides to leave the world of work and
retire, this relatively straightforward procedure changes. Gone is
the simplicity and certainty of the PAYE world. A newly retired
person will soon find themselves on their own when it comes to HMRC.
A combination of multiple sources of income, ranging from pensions to
interest on savings and investment dividends may well be high enough
to incur a liability to pay tax. But the answer to the “how
much should I pay” question may involve everything from the
source of the income, their age, marital status or even their ability
to see.
All of this can make the world of tax seem very complicated for
older people. Especially as the onus still remains on these taxpayers
to ensure that HMRC has all the information necessary to work out
what tax needs to be paid. So in setting out to try and improve
matters, the OTS involved a wide range of organisations whose purpose
is to help older people with their tax affairs. They told us where
they thought that tax law and HMRC's procedures could be changed
or improved so that the people they were helping could have a clearer
idea, in the future, about what tax they were liable to have to
pay.
In putting forward our proposals, we fully recognise the diversity
of life for people over the age of 60. Some want to carry on working
full time whilst others simply have a wish to enjoy the benefits of a
well earned retirement. Whichever group an individual is in, they
deserve to have their tax affairs dealt with in as straightforward a
way as possible. That has been the objective of this report. Our aim
has been to make practical recommendations that will provide
taxpayers of pensionable age and above with the chance of having
peace of mind about their tax affairs, especially as their years
advance. We want people who have worked hard all their lives and now
want some time to themselves not to have this period in their lives
distressed by having to worry unnecessarily about their tax
affairs.
Our interim report, published in March 2012, identified numerous
areas of complexity. Many related to administrative matters, rather
than legislative complexities, and it has been gratifying to see the
way which HMRC and the DWP have rapidly started to act on many of the
issues we identified. We congratulate those responsible: better
liaison between the two departments will make a real difference to
pensioners' positions. We have included HMRC's recent update
document on our interim report, showing where progress is being made,
in Annex A to this report.
In this report we have addressed a number of technical issues
within the tax system that cause complexity and looked further at
some administrative matters. Our recommendations are all focused on
simplifying – on making life easier for pensioners. Combined
with the actions already in hand as a result of our interim report,
they have a real potential to make a difference. We very much hope
that the Chancellor will recognise that this report and its proposals
fully reflect the concerns of today's pensioner taxpayers and
accept the recommendations which we have put forward.
No report like this just happens by itself and I would like to
conclude this report by paying particular thanks to our secondee
Martin Gunson whose tireless efforts and great knowledge in this area
of tax legislation have ensured that our recommendations are truly
practical in their intent. My sincere thanks also go to the OTS's
Katya Williams who brought to this project both energy as well as
analytical skills without which this report could not have been
produced. All of us also owe a real vote of thanks to the members of
our Consultative Committee who have really engaged with our work and
all contributed an enormous amount to developing this report.
Rt. Hon. Michael Jack
Chairman, Office of Tax Simplification
Executive summary
This final report is the culmination of a year and a half's
work looking in detail at pensioners' experiences of the tax
system. It builds on the work of the interim report on pensioner tax
issues, published in March 20121, which reviewed
the tax system and compiled a list of priority areas for further
review. It is these priority areas that we have considered in more
detail and which form the basis of our recommendations.
1
http://www.hm-treasury.gov.uk/d/ots_review_of_pensioners_tax_060312.pdf
As a society we are getting older and increasing numbers of us can
expect to celebrate our centenary. For the purposes of this review,
we have defined the pensioner population as those aged over 60
although many such people will not have ceased work. The path from
work into retirement is also becoming increasingly complex with the
end of a compulsory retirement age and increasing numbers of people
working longer, or mixing paid work with drawing a pension.
In addition to the phasing out of compulsory retirement ages,
other policy changes have occurred during the review (and will be
discussed in more detail in Chapter 3). Previous rises in the
personal and age allowances have taken many out of taxation and
reduced the eligibility and effectiveness of many of the allowances
we have reviewed. We also note that the Government's commitment
to a flat-rate State Pension for new retirees will mean that future
pensioners will have more certainty about their State Pension
income.
For many, the most radical simplification we could recommend would
be to exempt the State Pension from tax. However, this is in our view
not a realistic option, even with some pragmatic adjustment to the
personal allowance in exchange. Whilst noting that such an exemption
would simply confirm what many mistakenly believe to be the case, one
cannot ignore the large hole in the public finances it would create.
There are significant issues of fairness towards other taxpayers,
especially as the wealthiest pensioners would benefit most, and over
the last decade, pensioners have seen their incomes increase faster
than other groups2 (see Chapter 3).
2http://research.dwp.gov.uk/asd/asd6/2010_11/pi_series_1011.pdf
Our recommendations for simplifying pensioner taxation are in two
broad parts: legislative change to remove complexity in the tax
system, and administrative improvements which will make it simpler
for pensioners to comply with their obligations and claim their
entitlements.
The administrative changes we suggest will also be of benefit to
many non-pensioner taxpayers who face similar complexities in
managing their affairs especially in relation to savings taxation. We
are looking to HM Revenue & Customs (HMRC) and the Department for
Work and Pensions (DWP) to invest in improved communications and
processes to ease the administrative burden on pensioners. This
administrative investment contrasts with the policy recommendations
which may generate some modest net gains for the Treasury, depending
on what compensation is put in place. Our brief is to design a
package of recommendations which are broadly revenue neutral. It is
therefore important that the administrative recommendations are given
equal consideration as the policy changes we propose.
A full list of recommendations can be found in Chapter 2.
The age allowance
Our interim report suggested that we review the complexities
surrounding the age related allowance and its taper system in
particular. We have not considered this proposal further as the
Chancellor announced at Budget 2012 that the age related allowance
would be phased out.
One personal allowance for all, with the potential elimination of
tapering, is clearly a big simplification. It will remove a great
deal of confusion, missed claims for the higher allowance and
problems with tapering and is therefore something we would support
from a simplification point of view. However, we acknowledge there
may be interim complexities (and unmet expectations) for those caught
in the transition.
Administrative improvements
In our interim report in March 2012, we highlighted administrative
improvements that HMRC could achieve relatively quickly. We were very
pleased that HMRC rose to the challenge, and has made good progress
in taking these forward. A list of our recommendations and HMRC's
responses is in Annex A. Perhaps the most promising result is that
our review has prompted much closer working between HMRC and the DWP,
including a single point of contact for staff in each department on
pensioner issues, and electronic transfer of pension information from
the DWP to HMRC when someone starts to draw their State Pension.
Our review has highlighted the need to improve communications
about tax and the State Pension, and how the Pay as You Earn (PAYE)
system operates for those with income from several sources.
- We recommend that every April the DWP issues a P60 type form
(“DWP60”) stating the amount of taxable income (from
the State Pension and other taxable state benefits) which a
pensioner was entitled to in the previous tax year. This would
give pensioners an accurate figure for their taxable state income
and enable them to check they are paying the right amount of tax.
Currently pensioners receive an annual letter from the DWP setting
out their entitlement for the forthcoming year; however, they do
not receive a statement of their full annual entitlement for the
previous tax year. A DWP60 would also reduce the complexity which
arises from payment of the State Pension on a weekly rather than
monthly basis as many pensioners find it difficult to calculate
their annual income for a particular tax year. This would bring the
DWP into line with other pension providers and reduce errors and
confusion for pensioners who complete self assessment tax returns,
and help pensioners in PAYE to check their tax codes;
- We recommend that HMRC introduces a single composite PAYE
coding notice (“Form P2C”) which would aggregate the
various individual codes for each source of income in PAYE and
provide a reconciliation to the personal allowance. This would
provide explanation and reassurance, and make it easier to spot
errors. A consolidated notice will enable pensioners to see at
a glance how their personal allowance is used and to check that
they are paying the correct amount of tax. There will also be a
wider benefit to younger taxpayers with multiple jobs who will also
find it easier to check that they are paying the correct amount of
tax;
- The review highlighted a widespread lack of understanding of
concepts such as the personal allowance, the use and meaning of tax
codes and which parts of their income are taxable. To enable
pensioners to understand these important areas better we recommend
that the HMRC/DWP communications review (see Annex A) includes a
review of communications about how the State Pension is taxed, and
clearer information about how personal allowances and tax codes
operate, and which documents and figures pensioners need to be
aware of;
- Our work has highlighted a lack of understanding and engagement
with tax issues across the working population in PAYE, even before
they retire. Although we have not made specific recommendations in
this area (as this is beyond our remit) we believe further
education work is needed to engage taxpayers of all ages who are in
PAYE about the need to understand their tax codes, personal
allowance and savings taxation. This is an area of communications
which merits further investigation. We note the Government's
work on transparency in tax including the proposal to introduce
personalised tax statements from 20143 and feel
that improved communications have the potential to engage and
inform more people about tax;
- We recommend improvements to Form R85, which is issued
by banks and enables non-taxpayers to have the interest on their
savings paid gross rather than after deduction of tax at the 20 per
cent basic rate. Our specific recommendations to Form R85 are that:
- HMRC redesigns the Form R85 and helpsheet to make it
easier for individuals to use. HMRC should also liaise
better with banks and building societies to ensure that
taxpayers receive the correct information and advice on
registering for gross interest4;
- HMRC considers annual checks to ensure savers are not
over or underpaying tax through matching data and
taxpayers' records. This is in line with the recent
suggestions of the Low Incomes Tax Reform Group (LITRG) after
their most recent R85 “mystery shopper” exercise;
and
- Finally as part of the Government's “Digital by
Default” strategy, HMRC should provide the facility for
people in PAYE to be able to submit the Form R40 (to reclaim tax
paid on savings or investment income) electronically. The paper
Form R40 should also be revised with clearer headings and
explanations and should be tested with pensioner groups.
3http://cdn.hm-treasury.gov.uk/budget2012_complete.pdf
4 LITRG has produced a report on a small study
into how banks manage the R85 process. Their "mystery shopping
exercise" found evidence of poor understanding of the R85
process from bank and building society staff and often scant
information on deposit-takers' websites. For further
information on the exercise see http://www.litrg.org.uk/reports/R85_report_Jan2013
Policy recommendations
The policy areas we have reviewed in detail in Chapter 5 include a
range of often outdated, ineffective or badly targeted allowances and
reliefs which span both income and savings taxation.
Savings taxation is an area of complexity for all taxpayers. We
have looked in detail at the 10 per cent savings rate which,
as it is restricted to a narrow band of income and savings, is both
complicated to understand and to claim if the taxpayer does not file
a self assessment tax return.
- We recommend that the 10 per cent savings rate is
removed, as awareness and claim levels are so low that it is
ineffective in incentivising savings;
- Our view is that any savings incentives should be focused
around Individual Savings Accounts (ISAs) as they have high levels
of brand recognition and awareness and are already in place;
and
- We would advise against any changes to the savings tax regime
which involve complicated eligibility calculations or a reclaim
process, because they create barriers to take up.
We have reviewed the married couple's allowance which
is complex to understand and administer, and only available to people
born before 6 April 1935.
Logic would suggest that this allowance is removed as there is no
clear rationale for retaining it – unless it is intended to
encourage over 78 year olds to marry or enter into a civil
partnership. Clearly as those eligible get older, the allowance will
be claimed by fewer people and will eventually become obsolete.
Against this, there is the argument that the married couple's
allowance for all its complexity, is at least well-established and
reasonably well understood (in principle, if not in detail). Because
of this, we conclude that it would be difficult to abolish the
allowance.
- If married couple's allowance is to remain we recommend
that it is drastically simplified with a removal of the current
system of income abatements and changing the 10 per cent rate
system to a flat-rate payment.
Another area of review has been blind person's
allowance which does not provide a benefit to the majority of
blind people whose earnings or pensions are within their personal
allowance. The allowance provides the largest benefit to higher rate
taxpayers.
In order to make a claim for blind person's allowance in
England and Wales a person must be certified blind and be on a local
authority register of blind persons.5 Charities
have highlighted that the requirements for registering as blind can
make the blind person's allowance claims process time consuming
and complex.
- The OTS remains of the view that the blind person's
allowance is ineffective in helping the general population of blind
people and that it would be better if it were abolished and the
funds used to provide direct grants and support to blind
people. This could involve grants to buy equipment to enable
younger blind people to enter employment and increased support to
access digital government services; and
- If the abolition/grant route is not taken up, we recommend
that the claims process is simplified. We agree with a proposal
made by the Royal National Institute for the Blind that a medical
diagnosis of blindness should trigger an automatic notification to
local authorities and HMRC.
The review has also looked at a little known relief for
interest on loans for life annuities taken out before April
2009. This relief offers limited benefit to a small and rapidly
decreasing group of pensioners and its removal would enable the
remaining complex legislation relating to MIRAS (mortgage interest
tax relief at source) to be abolished. This would be a significant
legislative simplification:
- We recommend that sunset legislation is introduced to remove
the relief for interest on loans for life annuities taken out
before April 2009 at a fixed date in the future e.g. in five
years' time possibly with a pragmatic adjustment to related
interest payments. This should follow a consultation on the likely
impact and compensation for the loss of the relief.
5 In order to register as blind in Scotland or
Northern Ireland a person must be unable to perform any work for
which eyesight is essential.
1 Introduction
Background to the review
1.1 In July 2010, the Chancellor of the Exchequer announced the
creation of the Office of Tax Simplification (OTS). Following its
initial reviews into small business tax and tax reliefs, the OTS
wrote to the Exchequer Secretary to HM Treasury, David Gauke MP, in
June 2011 setting out possible areas of future
work.1 In reply, the Minister invited us to work on
two of our proposals: pensioner taxation and employee share
schemes.2
1
http://webarchive.nationalarchives.gov.uk/+/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 On 6 March 2012, the OTS published the interim report of the
review of pensioners' taxation. The report reviewed a wide range
of issues of administrative and legislative complexity and assigned
each issue a priority level.3
3 See Annex A for the interim report's
list of priority areas for further review and HMRC's
response
1.3 This report takes the issues identified in the interim report
and has reviewed in more depth those identified as high priority. The
review identified two main sources of tax complexity for
pensioners:
- complex legislation and policy which may be difficult for
pensioners to understand and use; and
- complex administration where processes e.g. forms, claims or
taxpayer information are so complicated or inaccessible that it is
difficult for pensioners to comply with their obligations or claim
their entitlements.
1.4 Since the interim report HM Revenue & Customs (HMRC) has
been working on improving some of the more immediate administrative
issues raised by the OTS interim report. HMRC reported on its
progress over the summer and sent a formal response in November 2012
which was published on the OTS website (see Annex A.)
1.5 The full terms of reference of the OTS review of pensioner
taxation can be found in Annex C.
The methodology of the review
1.6 The review process involved a range of evidence gathering
activities. The OTS set up a Consultative Committee of experts to
advise it on the review (see Annex C for membership). For the second
stage of our review, members of the committee formed three subgroups
addressing the following themes: PAYE and the State Pension; policy
simplifications; and HMRC administration and communications. These
subgroups explored the issues raised in the interim report in detail
and consulted with interested parties about the issues and possible
solutions.
1.7 We also spoke to some large organisations in financial
services, retirement accommodation and local government that had a
sizeable pensioner customer base. The OTS reviewed academic and
research literature including work commissioned by the Department for
Work and Pensions (DWP) and charities such as Age UK, Tax Help for
Older People, the Low Incomes Tax Reform Group (LITRG) and the Royal
National Institute for the Blind (RNIB). Our committee members
provided a good level of insight into the needs and concerns of
pensioners who pay for tax advice and those who receive help and
advice through the voluntary sector. However, we were also keen to
find out more about unrepresented pensioners' experience of
complexity in the tax system so we collaborated with HMRC to
commission external research with unrepresented pensioners.
Research
1.8 In autumn 2012, the OTS worked with HMRC to commission a
formal qualitative research project4 to explore the
attitudes and experiences of pensioners in relation to taxation.
4http://www.hmrc.gov.uk/research/reports.htm
1.9 The research was carried out by an external contractor, Steel
Magnolia, and involved interviews and focus groups with 83 pensioner
and pre pensioner respondents from across the UK. We specified that
this external research sampled pensioners who were not paying for tax
advice and were not clients of charities represented on our
Consultative Committee in order to obtain a spread of pensioner
opinion and test some of the assumptions from the interim report. We
also specified that respondents should have an income tax liability.
This was because we wanted the research to focus on the pensioners
most likely to be managing their tax affairs themselves or with
family support.
1.10 The research has informed our recommendations and highlighted
important areas for HMRC and the DWP to review in more detail. We
therefore recommend that the research be updated in a few years to
review progress against our recommendations and how far they have had
an impact on pensioners' experience of the tax system.
1.11 The findings of the research are explained in further detail
in Chapter 3.
Analysis
1.12 Following the research findings, the OTS team worked closely
with analytical and policy teams in HMRC, HM Treasury and the DWP to
explore the potential costs and impacts of various simplification
proposals.
1.13 We also discussed our emerging recommendations with our
Consultative Committee members to arrive at a balanced package of
simplifications that we believe will make a real difference to
pensioners. We are extremely grateful to the committee members for
their expert advice, but should make it clear that the final
judgments about what to recommend were those of the OTS.
2 List of recommendations
2.1 The OTS recommendations have two broad themes: administrative
and policy (legislative) changes.
Administrative recommendations
1 We recommend that every April the DWP issues a P60 type form
(DWP60) stating the amount of taxable income (from the State Pension
and other taxable state benefits) which a pensioner was entitled to
in the previous tax year. This would give pensioners an accurate
figure for their taxable state income and enable them to check they
are paying the right amount of tax;
2 We recommend that HMRC introduces a single composite PAYE coding
notice (Form P2C) which would aggregate the various individual codes
for each source of income in PAYE and provide a reconciliation to the
personal allowance. This would provide explanation and reassurance,
and make it easier to spot errors;
3 We recommend that the HMRC/DWP communications review (see Annex
A) includes a review of communications about how the State Pension is
taxed, clearer information about how personal allowances, and tax
codes operate and which documents and figures pensioners need to be
aware of;
4 We recommend improvements to Form R85, which is issued by banks
and enables non-taxpayers to have the interest on their savings paid
gross rather than after deduction of tax at the 20 per cent basic
rate, which applies to most savings accounts. We recommend that HMRC
redesigns Form R85 and helpsheet to make them more usable for
taxpayers;
We also suggest that:
a HMRC should also liaise better with banks and building
societies to ensure that taxpayers receive the correct information
and advice on registering for gross
interest1;
b HMRC considers annual checks to ensure savers are not over or
underpaying tax through matching their data and taxpayers'
records; and
1http://www.litrg.org.uk/reports/R85_report_Jan2013
5 We recommend that as part of the Government's “Digital
by Default” strategy, HMRC should provide the facility for
people in PAYE to be able to submit the Form R40 (to reclaim tax paid
on savings or investment income) electronically. The paper Form R40
should also be revised with clearer headings and explanations and
should be tested with pensioner groups.
Policy recommendations
6 We recommend that the 10 per cent savings rate is removed, as
awareness and claim levels are so low that it is ineffective in
incentivising savings;
7 Logic would suggest that the married couple's allowance is
removed. There is no clear rationale for its retention and it is a
source of confusion and error. However, it is at least
well-established and will eventually become obsolete. Because of
this, we conclude that it would be difficult to abolish the
allowance. If married couple's allowance is to remain, we
recommend that it is drastically simplified with a removal of the
current system of income abatements and instead a flat-rate
payment;
8 The OTS remains of the view that the blind person's
allowance is ineffective in helping the general population of blind
people and that it would be better if it were abolished and the funds
potentially available for tax relief used to provide direct grants
and support to blind people. It has been suggested that this could
involve grants to buy equipment to enable younger blind people to
enter employment or increased support to access digital government
services;
9 If the abolition/grant route is not taken up, we recommend that
the process of claiming the allowance is simplified. We agree with
RNIB's proposal that a medical diagnosis of blindness should
trigger an automatic notification to local authorities and HMRC;
and
10 We recommend that sunset legislation is introduced to remove
the relief for interest on loans for life annuities taken out before
April 2009 at a fixed date in the future e.g. in five years'
time, possibly with a pragmatic adjustment to related interest
payments. This should follow a consultation on the likely impact and
compensation for the loss of the relief.
3 The wider pensioner tax context
3.1 For many people the transition into retirement marks a shift
from relatively simple tax affairs with maybe one source of PAYE
income into often managing multiple income streams. This may
potentially mean having to file a self assessment (SA) tax return for
the first time. Therefore in addition to commissioning research with
pensioners we reviewed the evidence about pensioners' awareness
of key tax concepts e.g. a personal allowance and tax codes, their
financial literacy and interactions with wider government
services.
3.2 The policy context is also changing. Budget 2012 increased the
personal allowance from £7,475 to £8,105 for 2012-13 for
people under 65, from £9,940 to £10,500 for people aged
65-74 and from £10,090 to £10,660 for those aged 75 and
over.1 Following the announcement in the Autumn
Statement 2012, the main personal allowance will rise to £9,440
in 2013-14.
1http://cdn.hm-treasury.gov.uk/budget2012_complete.pdf
3.3 Conversely, the freeze in the age related allowance announced
in Budget 2012 could move some pensioners with index-linked pensions
into taxation. From 2013-14, the age related personal allowances will
not be increased and will only be available to people born on or
before 5 April 1948 for the allowance worth £10,500; and on or
before 5 April 1938 for the allowance worth £10,660.
3.4 The Government published a white paper on 14 January
2013,2 confirming plans for a flat-rate State
Pension (of at least £142.70 per week) from April 2017. We think
this makes our recommendations around improving communications about
the State Pension even more important.
2http://www.dwp.gov.uk/docs/single-tier-pension.pdf
Pensioners’ financial context
3.5 According to the 2011 census,3 the pensioner
population is rising and in 2011, 1 in 6 UK residents were over 65
years old compared with 1 in 20 in 1911. The Office for National
Statistics' (ONS) latest figures on pensioner incomes has found
that the average income of pensioners grew faster between 1998-99 and
2010-11 than average earnings, with pensioners' net income after
housing costs increasing by 40 per cent as compared with an increase
of 11 per cent in average net earnings after housing costs during the
same period.4
3http://www.ons.gov.uk/ons/dcp171778_270487.pdf
4http://research.dwp.gov.uk/asd/asd6/2010_11/pi_series_1011.pdf
3.6 However, income levels vary. The same survey found that
although in 2010-11, 68 per cent of pensioner households were
receiving investment income e.g. from savings or stocks and shares,
half of them received £4 a week or less. A higher proportion of
pensioner couples than single pensioners had income from investments
or savings which contributed to them having much higher incomes on
average than their single peers. In 2007-08 it was estimated that 50
per cent of pensioners paid income tax and 3 per cent of pensioners
were higher rate taxpayers.5
5
http://www.publications.parliament.uk/pa/cm200809/cmhansrd/cm090611/corrtext/90611c0001.htm
Pensioners’ financial literacy and their awareness of key
concepts in tax: the OTS/HMRC pensioner research project
3.7 In autumn 2012, the OTS and HM Revenue & Customs (HMRC)
commissioned research into pensioner experiences and knowledge of the
tax system. The research was carried out by an external research
agency, Steel Magnolia, and involved interviews and focus groups with
83 pensioner6 and pre pensioner7
respondents from across the UK.8 We specified that
this external research sampled unrepresented pensioners who were not
paying for tax advice and were not clients of charities represented
in our Consultative Committee. The research sample ranged from 60-79
years in age. The research sample included a mixture of income levels
(though all had to be eligible for income tax so that they would have
experience of interacting with the tax system), a balance of genders
and experience of paying tax through PAYE and SA. We also asked that
the sample included pensioners from minority ethnic backgrounds,
pensioners in rural areas and those with caring
responsibilities.9
6 The research study defined a pensioner as
aged 60 or over, in receipt of pensions (including the State
Pension) or otherwise retired and living wholly or partly off
investment income
7 A pre pensioner was defined as someone
thinking of retiring within the next 12 months i.e. taking income
from a pension (state, workplace or private).
8 The agency spoke to pensioners in all
the nations of the UK. For more details on the sample and the
research findings please see http://www.hmrc.gov.uk/research/reports.htm
9 A Carer was defined as caring for or
managing the tax affairs of anyone in their family (parents, aunts,
spouses or partners) who was considered frail or vulnerable. They
were also all pensioners themselves.
3.8 The research carried out by Steel Magnolia for HMRC and the
OTS largely supported the evidence we received from committee members
indicating that the issues raised about knowledge and understanding
of the tax system and the impact of complexity affect a broad
spectrum of pensioners.
3.9 The research found that many pensioners were anxious about
dealing with taxation and apprehensive about making contact with
HMRC. They expected tax to be complicated, although they did not
think this should be the case. Many were reluctant to claim
allowances or reclaim tax owed as they felt that the forms would be
too complicated and they were uncertain about the likely reward as
compared with the risk of opening themselves up to further scrutiny
by HMRC. Much of the anxiety was caused by a lack of understanding of
the tax system and a fear of “getting it wrong”. There
are significant lessons here for HMRC and the Department for Work and
Pensions (DWP) about the need to improve communications with
pensioners.
3.10 The research highlighted two main approaches to engaging with
tax and with HMRC in our research sample. Some pensioners were
broadly “passive” i.e. they largely sat back and expected
the system to deliver the correct tax result to them (this group
mainly comprised pensioners who were used to paying tax via PAYE and
those who were less affluent). This contrasted with the more
“active” group who were more likely to understand and
engage with their tax affairs. This group mainly comprised more
affluent respondents and those who had experience of the self
assessment process. Although most pensioners understood that they had
a personal allowance and income exceeding this was taxed, many,
particularly in the passive group, were not aware of the amount.
There was also limited understanding about tax codes, in particular
how they related to each source of income. This was in line with our
discussions with tax advisers and the voluntary sector.
3.11 A key finding from this research was that many of the
pensioners in the sample did not consider their State Pension to be
income. Many, particularly older and more passive pensioners, saw it
as an entitlement from “paying their stamp” rather than
as a source of income to be taxed. This is a significant issue as
many remain unaware that the State Pension is taxable. The fact that
state retirement pension is not taxed at source by the DWP can cause
confusion and even distress when people find out that they are being
taxed. We therefore recommend that the HMRC/DWP communications review
(see Annex A) includes a review of communications about how the State
Pension is taxed, and clearer information about how the personal
allowance and tax codes operate, and which documents and figures
pensioners need to be aware of. Recommendations to improve
communications around taxation of the State Pension are proposed in
Chapter 4.
3.12 Interestingly, while more affluent and “active”
pensioners in the research sample viewed investment income as one of
their sources of income, the majority of pensioners in our research
sample didn‟t view interest from savings as income. This was
mainly because the sums involved were so low that the term
“income” felt inappropriate. This has important
implications for tax policy as in order to understand and calculate
the 10 per cent savings rate, a taxpayer must understand that they
have both savings income and pension income, and that the relative
proportions of these affect their eligibility for the savings rate.
This was particularly highlighted by the research which tested the 10
per cent savings rate through a worked example and demonstrated both
the complexity and the resulting frustration when our research
respondents tried to assess their eligibility for it. We review the
10 per cent savings rate and savings taxation in more detail in
Chapter 5.
Digital services
3.13 Research commissioned by the DWP in 201010
found that while many pensioners use the internet for information,
fewer use it for transactions and many are concerned about security
online (three-quarters of pensioners they surveyed who used the
internet had bought goods and services online but two-thirds of them
were reluctant to share private information online). Internet use is
also strongly associated with socio-economic circumstances with
higher use and confidence among higher income groups. The majority of
pensioners in our research sample who filed annual self assessment
(SA) returns were filing online and were confident with computer use.
However, they were also among the more affluent members of the
sample.
10http://research.dwp.gov.uk/asd/asd5/rports2009-2010/rrep703.pdf
3.14 For those in the research sample who did not file online this
was often due to a preference for paper filing (the ability to make
copies of the return for their records) or hesitance in using the new
technology for this purpose. This must be taken into account in the
Government's “Digital by Default” strategy because,
although many pensioners will benefit from increased access to online
services, provision will still need to be made for those who are
unable to access these services.
4 Making life easier for pensioners – administrative
improvements
Introduction
4.1 Early in the review our work highlighted areas of complexity
for pensioners which could not be tackled by legislative change. A
key strand of this work has therefore been reviewing the everyday
issues of communications and administrative processes which create
complexity for pensioners who are trying to meet their tax
obligations.
4.2 HM Revenue & Customs (HMRC) has been working on
implementing some of the more immediate administrative suggestions
raised by the interim report. HMRC reported on its progress over the
summer and gave the OTS a formal update in November 2012, which has
been published on the OTS website (see Annex A).
A. Pay as You Earn (PAYE) and the State Pension
4.3 One of the issues raised in both the interim and final stages
of the review was the level of complexity and anxiety caused by the
way the State Pension is currently taxed. The Department for Work and
Pensions (DWP) does not operate PAYE on the State Pension, so any
income tax liability is normally collected through adjusting the PAYE
tax code applying to other sources of income being taxed under PAYE.
This only works if the pensioner has sufficient other income. If
there is insufficient other PAYE income, the tax has to be collected
via self assessment (SA). This can lead to some pensioners being in
the self assessment process to collect small amounts of tax.
4.4 The group who are most disadvantaged by the current process
are those who are placed into self assessment in order to pay the tax
due on the State Pension. This can affect pensioners who made high
State Earnings-Related Pension Scheme (SERPS) or State Second Pension
contributions and now receive an additional State Pension which with
the basic State Pension gives them an income higher than their
personal allowance, and also pensioners who do not have another
source of PAYE income large enough for the tax on the State Pension
to be collected through PAYE – as highlighted in the interim
report.1 Where a pensioner has a State Pension
which is higher than the personal allowance and no other income, they
will have a tax liability which cannot be collected through PAYE and
will therefore need to complete an SA tax return and pay the tax as a
lump sum each year or each six months.
1
http://www.hm-treasury.gov.uk/d/ots_review_of_pensioners_tax_060312.pdf
Box 4.A: How a large State
Pension can result in a pensioner having to complete a self
assessment return
Jill is 70 years old and has State Pension of
£11,500 in 2012-13. She has no other income. As her
personal allowance for 2012-13 is only £10,500, she will
be liable to tax on £1,000 of the State Pension and will
have to complete and submit a tax return and pay the £200
due. |
4.5 The OTS commissioned analysis by HMRC into the numbers
affected by this and found that the number of pensioners in self
assessment solely as a result of having a State Pension larger than
their personal allowance was likely to be around 29,000
people2 in 2010-11. The number of people who made
high levels of SERPS/State Second Pension contributions who are
eligible for large State Pensions is also predicted to fall. The
Government's proposal to introduce a flat-rate State Pension for
new retirees3 will have an impact on this issue in
due course.
2 See Annex A to this report. The OTS
commissioned HMRC's analytical division to review their
internal data on the reasons state pensioners enter self
assessment.
3http://cdn.hm-treasury.gov.uk/budget2012_complete.pdf
4.6 Where the State Pension is more than the personal allowance, a
special code may need to be issued – a K code – which
results in tax being calculated on more income than the pensioner is
receiving from that source. There are special rules for K codes, one
of which is that the tax deducted in any one week or month must not
exceed 50 per cent of the taxable income.
4.7 We are aware that the 50 per cent rule can sometimes be too
inflexible. This means that in certain combinations of circumstances,
insufficient tax can be collected from a pension even though the
taxpayer would like more tax to be deducted from the pension so that
they pay the tax due through PAYE rather than having to enter the SA
process. It has been suggested that this rule could be amended to
allow taxpayers the flexibility to elect to stay in PAYE in these
circumstances. We suggest that HMRC reviews the current
implementation of the 50 per cent rule and where flexibility for
taxpayers can be increased.
4.8 Collecting the tax on the State Pension indirectly (through
PAYE on another source of income) can lead to anxiety and confusion
for pensioners who do not understand why the tax taken from their
private pension may appear higher than expected. It is often not
clear to the pensioner that the additional tax taken is to settle
their State Pension tax liability.
Box 4.B: How taking the tax due
on the State Pension from another source of income can lead to
confusion.
In 2012-13, Mohammed who is 80 years old has a State
Pension of £10,500 and a pension from his former employer,
ABC Limited, of £11,000. His personal allowance is
£10,660. The allowances available to set against his ABC
Limited pension are reduced by the amount of his State Pension
to £160. He therefore has tax deducted from his ABC
pension of £2,168 (£11,000 – £160 at 20
per cent). This is 19.7 per cent of his ABC pension.
Mohammed is puzzled why he is paying nearly 20 per cent tax on
his ABC pension when he knows some of his income should be tax
free. |
4.9 During the review many of those we consulted suggested that a
solution would be for the DWP to operate Pay as You Earn on the State
Pension and deduct at source. The OTS commissioned provisional
estimates from the DWP and HMRC for the likely cost for the DWP to
operate PAYE on the State Pension, both for all pensioners and for
the approximately 29,000 pensioners most affected. The DWP's
initial very tentative estimate of the set up costs indicates that
operating PAYE on the State Pension would have a substantial cost to
the department, probably in excess of £100 million. The DWP has
been unable to provide an estimate for the ongoing running costs.
There was little difference in cost for operating PAYE for the small
affected group or for all pensioners because the DWP considered that
the State Pension might be above or below the personal allowance from
year to year. It would therefore be necessary for the DWP to open a
PAYE file on all pensioners not just those for whom the pension was
higher that the personal allowance so that those who might or might
not need tax deducted would be identified each year.
4.10 The OTS also asked HMRC to assess the likely impact of any
change. Its key concern was the size of the payroll scheme necessary
(the DWP would be operating PAYE on behalf of approximately 12
million state pensioners which would be 10 times larger than the
largest employer payroll that HMRC currently deals with). HMRC also
highlighted the risk of such a high level of transactions to the Real
Time Information computer system which is due to launch fully in
April 2013. Both departments highlighted the risks involved in
creating a new IT system whilst the DWP works to implement large
scale changes to the welfare system such as Universal Credit.
4.11 In the light of these projected costs, the operational risks,
and the limited numbers of people who it is believed would directly
benefit from this change, we have stopped short of recommending that
the State Pension is brought into PAYE. We suspect that were we
starting from a blank sheet of paper to design a new tax system,
State Pension would be set up to operate within the PAYE system but
we accept that the change from the current position would be too
great an undertaking at present.
4.12 However, given the legislative changes and that our
assumptions about the likely fall in the affected population are
estimates, it is something which should be kept under review. After
all, all private pension providers have to operate PAYE on pension
payments.
B. Improving communications about which income is taxable
4.13 Although the issue of how the State Pension is taxed causes
problems for some pensioners, there is also a lack of understanding
among pensioners that the State Pension is taxable at
all.4 This is compounded by poor communications
about how the State Pension is taxed. After the initial work on the
consequences of PAYE not being applied to the State Pension, the OTS
looked at how these issues could be addressed by better
communications about taxation and the State Pension.
4 The qualitative research we commissioned
with HMRC found that pre pensioners' and pensioners'
knowledge and understanding of the issue remains patchy with many
unaware that the State Pension was taxed at all.
4.14 Currently many pensioners receive their pension every four
weeks rather than every calendar month. If pensioners complete a self
assessment (SA) return, they need to enter a figure for the amount of
their State Pension entitlement for the year. As the current payment
schedule does not coincide with the annual tax year, some pensioners
have difficulty in calculating the annual amount of State Pension
income they need to enter on their tax returns. A very common error
is to take the amount paid into their bank account each month and
multiply by 12 rather than 13 on the assumption that the amount is
paid monthly rather than four-weekly.
Box 4.C: Common errors in
calculating taxable State Pension income
Oliver needs to complete his 2011-12 self assessment
tax return, and needs to know the amount of his State Pension.
He has looked at his bank statements and noted that in April
2011 he received £399.60 and then regular payments of
£408.60, which he assumes are monthly, as with all his
other pensions. So he takes £399.60 and 11 x £408.60
giving £4,894.20. However, he hadn‟t realised that
the amount he should declare is based on entitlement and that
the payments received were actually four-weekly (so 13 in a tax
year). The correct calculations would be 52 x £102.15,
giving £5,311.80. The incorrect figure will result in an
underpayment of £83.52 in tax plus the risk of a penalty
charge – all of which could be avoided if the DWP issued
a notice (which could be called a DWP60) telling him how much
State Pension he was entitled to for 2011-12, as other pension
providers do.
Donald has received his 2011-12 P800 PAYE statement and wants
to check the pension shown is correct, so he takes the letter
received in March 2012 and multiplies the amount shown by 52.
However the amount relevant for 2011-12 was actually provided
in a letter in March 2011 and the amount he uses represents the
2012-13 rate. He is confused and concerned that the P800 shows
a figure which is £275.60 lower than what he has
calculated and calls the HMRC helpline. This could have been
avoided with a DWP60. |
4.15 The current HMRC SA guidance5 directs
pensioners to their “About the general increases in
benefits” letter which the Pension Service sends informing
pensioners of their entitlements (also referred to as the annual
uprating letter). As pensioners are not given a full annual figure
for their entitlement they must still perform a range of calculations
to arrive at the correct figure for their tax return (see Box 4.D
below).
5www.hmrc.gov.uk/worksheets/sa150.pdf
Box 4.D: Extract from “How to fill in your tax
return 2012” HMRC guidance6
If you received State Pension for the full year to
5 April 2012, to calculate the total amount you were entitled
to for the year, multiply your weekly entitlement by 52. If
your weekly entitlement changed during the year you will need
to multiply each amount by the number of weeks for which it
was received, up to a maximum of 52 weeks.
For the year ending 5 April 2012, if you were paid weekly or
four-weekly and your payday was a Wednesday or Thursday, you
need to add one extra week's pension to the amount
calculated as above because there were 53 Wednesdays or
Thursdays during the full tax year.
If you received State Pension for part of the year, you will
need to count the number of weeks from the date your State
Pension began to 5 April 2012 and multiply this by your
weekly entitlement to calculate your total entitlement for
this tax year.
As a guide to the total of your weekly entitlements for a
full year, if you were paid:
- weekly – add up the 52 weekly amounts as shown on
your bank statement or building society passbook (if you
were paid by direct debit);
- four-weekly – multiply your 4-weekly amount by
13; and
- quarterly – multiply the quarterly amount by
4.
As well as your basic State Pension, the box 7 figure
should include:
- any graduated pension;
- the age addition if you are over 80;
- increases paid by the Department for Work and Pensions
to uprate a guaranteed minimum pension;
- any addition for a dependent adult;
- any extra pension paid because you deferred or
temporarily gave up your State Pension; and
- if you are married or in a civil partnership, any State
Pension payable to you because of your spouse's or
civil partner's National Insurance contributions.
The figure should not include:
- any addition for a dependent child;
- annual Christmas bonus; or
- Winter Fuel Payment.
They are not taxable.
|
6www.hmrc.gov.uk/worksheets/sa150.pdf
4.16 Another issue highlighted by both our interim and final
review process was that of taxable social security benefits. Although
a review of pensioners' experiences of state benefits is strictly
outside the scope of this review, it is clear from our consultations
with committee members and our research that many pensioners are not
clear about which of the benefits they receive, such as attendance
allowance, and winter fuel allowance are taxable.
4.17 The only information they may have apart from an annual
uprating letter which sets out the new levels of payment for the
forthcoming year, are the credits into their bank account. These may
be payments of all their state benefits and State Pension
combined.
4.18 As income tax is based on their entitlement to social
security benefits and the State Pension rather than what they have
received over the year calculations of the bank account
credits received in a year are often incorrect for tax purposes. This
makes it very difficult for pensioners to accurately calculate their
annual taxable income from the State Pension and to unravel which of
their benefit payments are taxable and which are non-taxable and the
annual amounts of each.
Box 4.E: Common errors in
calculating taxable social security income
Enid's daughter helps her complete her SA
return. She cannot find the letter from the DWP advising Enid
about the payments to be made in the next tax year so she adds
up all amounts paid into her mother's bank account by the
DWP. This includes the annual Christmas bonus of £10, the
fuel allowance of £200 (both of which are not taxable)
plus 13 payments of „pension‟. She doesn‟t
realise that the „pension‟ payments include
attendance allowance of £51.85 a week which is not
taxable. As a consequence Enid pays over £580 too much
tax. |
4.19 One of the suggestions from the interim report was that the
final stage of the review would explore the feasibility of the DWP
producing an annual P60 type statement (a DWP60) in line with other
pension providers. This would set out clearly the income entitlement
from the DWP in the tax year, showing totals of taxable and
non-taxable income. This idea was well received by both committee
members and pensioner groups we consulted with. Frontline staff at
HMRC we spoke to also felt this would improve the accuracy of self
assessment returns and would reduce the numbers of reassurance and
clarification calls from pensioners. It would also enable people to
understand better their P2 coding notices.
4.20 The OTS asked the DWP to provide an estimate of the likely
costs and benefits of producing a P60 type notice for pension and
benefits which would go out with the annual mailing to pensioners.
They estimated that this would have a substantial set up cost
amounting to tens of millions of pounds, though it would be much less
than operating PAYE on the State Pension.
4.21 The DWP also raised the issue of a new communication to
pensioners prompting many calls to helplines, simply because any new
official communication will cause worry and confusion, however
carefully the letter is worded. We understand the point but believe
that any such surge would quickly tail off – and would also
mean many fewer calls requesting details of income for tax returns
and other issues.
4.22 HMRC has similarly raised concerns about a new letter
increasing reassurance calls particularly as around half of the 12
million state pensioners who would receive the mailing are not
chargeable to income tax. Their preliminary estimates do not project
an initial cost saving because in the short term calls from
pensioners asking for clarification about their taxable income (now
obviated by the DWP60) may be replaced by reassurance calls. HMRC was
not able to provide an estimate of the longer term impact once the
communication becomes routine.
Box 4.F: OTS estimate of the
cost of pensioners’ time in calculating their State
Pension and social security income
The OTS has tried estimating the current costs to
pensioners of having to understand and complete the calculation
(excluding the time spent on calls to HMRC or other sources of
support). There are approximately 2 million pensioners in self
assessment and we estimate that understanding and executing the
calculation (either through reading the guidance, consulting
with friends, charities or HMRC) will take one hour on average.
Using the NAO's estimate of the cost of a taxpayer's
time7 at 25 pence a minute this produces a
cost of £15 each per pensioner. If we assume that 10 per
cent struggle with the calculation this would produce a cost of
£3 million, if 25 per cent struggle this rises to
£7.5 million if nearer 50 per cent struggle we estimate
that this would cost pensioners in SA £15 million in lost
time. |
7
http://www.nao.org.uk/publications/1213/hmrc_customer_service.aspx
4.23 Overall, a DWP60 for State Pension/benefits would enable
pensioners to assess their taxable income for a particular tax year
simply and clearly. This could be done through a separate mailing to
pensioners, but it would be better as an additional notice sent out
alongside the annual uprating letter or, in line with many private
pension providers, the statement could be printed on the reverse of
the uprating letter so that both the previous and the following
years' entitlements are sent out at the same time. This would
also minimise postage costs and potential increased reassurance calls
to the DWP or HMRC triggered by a “new” piece of
communication.
4.24 Another suggestion is to provide the statement online so that
it could be accessed when required (rather than sent to all
pensioners many of whom do not pay income tax). Although this idea
does have merit and would be cheaper than a paper mailing, we have
concerns about whether this method would reach all the pensioners who
may benefit from it. That said, we would certainly welcome the
statement also being available online for those who wish to access it
there.
4.25 Despite the likely costs and risks of implementation the OTS
strongly feels that on balance the benefit to the wider pensioner
population (approximately 12 million state pensioners) outweighs the
costs and therefore recommends that the DWP works towards producing a
DWP60 as part of the wider operational and IT changes necessary to
support the introduction of the flat-rate State Pension in the next
few years.
4.26 We therefore recommend that the DWP issues an annual DWP60
statement for all pensioners each April setting out the total State
Pension they were entitled to in the previous tax year, along with
details of any benefits received, showing clearly taxable and
non-taxable amounts. We recommend both HMRC and the DWP work with
pensioner groups to ascertain the best route but our expectation is
that the result would be sent out with the annual uprating
letter.
4.27 We are aware that the DWP is concerned about making
significant changes to its computer systems whilst bedding in large
scale changes such as Universal Credit. The OTS has therefore
discussed possible interim solutions with HMRC and the DWP. These
include work on providing better information in the accompanying
notes to the annual letter (making it clearer which benefits are
taxable). However, our consultations show that engagement with
helpsheets and guidance materials is often inconsistent. Therefore,
we feel that a generic list of taxable state benefits within the
helpsheet will not provide the individual information that a full
DWP60 will offer and that we believe is needed.
4.28 Some of the issues raised would be resolved if HMRC was able
to pre populate SA returns with the information they receive from the
DWP on a pensioner's entitlements for a tax year. We would
encourage HMRC to do an analysis of the costs and benefits of pre
population as we feel it would be of benefit to pensioners. However,
this would only be of benefit if the information used is accurate and
we have been made aware of instances where HMRC has used inaccurate
pension information when State Pension entitlements change.
4.29 In making this recommendation we are aware that we are
calling for spending by one government department in order to save
money in another. We can see a risk that the recommendation will fail
because departmental budgets are kept separate. However, we feel
strongly that this is an issue that needs a practical demonstration
of “joined-up government”.
4.30 As a final comment in this section, we would just return to
the issue of pensioners who are drawn into self assessment simply to
collect a small amount of tax on their state pension (paragraph 4.3
and Box 4.A). There is no obvious route to solve this issue, though
we would naturally hope that HMRC keeps the issue of a suitable de
minimis threshold under review. It is difficult for us to recommend a
particular level for reasons of fairness to all taxpayers. But we
think that the recommendations we have made about the DWP60 (and
indeed our general recommendations about improving communications
around the state pension) will at least help the Jills who are drawn
into self assessment deal with their tax responsibilities.
C. Improving communications about how tax codes are applied
4.31 As they approach retirement, pensioners are often moving from
simple to complex tax affairs. A key issue for them is the taxation
of multiple sources of income (state, personal and occupational
pensions for example). This is made more complex as the divide
between retirement and employment is increasingly blurred with more
people working part-time while drawing part or all of their pensions.
An issue for many pensioners is receiving several tax codes. Often
they do not realise that they will receive a different tax code for
each source of income and may become anxious about a possible error
when a second or third coding notice arrives. They may also
mistakenly believe all new coding notices are replacements and
discard previous notices.
4.32 During the introduction and stabilisation of HMRC's
National Insurance and PAYE service (NPS) in 2010-11 many pensioners
received multiple tax code notices as previous errors were rectified.
Although HMRC has made considerable progress in clearing its backlog
of cases and sending more accurate codes, our consultations with
pensioner groups and advisers indicate that for many it is not always
clear whether a second or third tax code relates to the current tax
year or how each code relates to each other.
4.33 Our interim report suggested that we explore the provision of
a single composite tax code notice which would outline the code for
each source of income in PAYE. This would enable pensioners to check
more easily that their tax affairs were correct and would reduce the
anxiety of receiving multiple notices without a clear understanding
of how they are connected. There would also be a benefit to
non-pensioners with multiple sources of income who may also find it
difficult to check that their tax code is correct.
4.34 We therefore recommend that HMRC introduces a single
composite PAYE coding notice (Form P2C) which would aggregate the
various individual codes for each source of income in PAYE and
provide a reconciliation to the personal allowance. This would
provide explanation and reassurance, and make it easier to spot
errors.
4.35 We accept that this recommendation will incur costs and mean
even more paper flowing to pensioners initially, as we assume that
the P2C would supplement the continuing flow of P2s. However, the P2C
could well replace many individual P2s, assuming that the P2C
includes a running list of codes. Even without this possible
replacement saving, it needs to be set against the current position:
ineffective and even confusing communications, causing problems for
all, including HMRC who have to field many calls to helplines.
4.36 As a further point, an HMRC frontline staff member suggested
that HMRC might colour code each year's coding notices, making it
easier to see which coding notices relate to a particular year. We
feel that a visual approach would be helpful to pensioners. It would
also help advisers where they have to review many years' worth of
tax codes. Some alternative means of identifying different years
would need to be found for those with impaired vision and we
therefore recommend that HMRC reviews alternative provision in these
cases.
D. Wider improvements to communications
4.37 The OTS's interim report suggested that the final phase
should explore how best to raise awareness of how the State Pension
is taxed. The research8 we commissioned highlighted
low levels of awareness and understanding about tax codes and the
personal allowance. Examples of comments made by pensioner
respondents to the research are set out in Box 4.G below.
Box 4.G: Quotations from the
OTS and HMRC commissioned research in relation to taxation of
the State Pension and the personal allowance.
“I didn‟t know. I thought (my State
Pension) was tax free.” Female pre-pensioner from
Northern Ireland
“(£8105 is) tax free? So what I‟m earning
above that is what is being taxed? You see I don‟t
understand this. That's interesting. “ Male
pensioner from the north of England
“That is what I do not understand. I thought when you
retired you did not pay income tax at all. I suppose it must be
related to how much you are receiving in a year…… I
found out through my friends who are in similar
circumstances.” Female pensioner from
Scotland
“I suppose, the pension I receive from my late husband
will not be taxed maybe because that will be part of an
allowance. I think it is taxed now. I presume that when I get
the State Pension, which I don‟t get until I‟m 62,
I presume that will be taxed. I can't remember. There is
how much you can earn before you are taxed?” Female
pre-pensioner from the north of England |
8http://www.hmrc.gov.uk/research/reports.htm
4.38 One of the successes of our pensioner review has been a drive
across HMRC and the DWP to promote closer working between the
departments in relation to communications with pensioners. HMRC
customer teams are now engaged more closely with their DWP
counterparts and we were pleased to see that this has been endorsed
by the frontline HMRC team we visited who reported on the benefits of
having a named contact and regular communications with their
pensioner counterparts at the DWP. One of the benefits of this closer
working initiative has been work on a new communications strategy for
pensioners. HMRC has committed itself to working with the DWP on a
review of communications in its response to the interim
report.9 Further details are in Annex A.
9
http://www.hm-treasury.gov.uk/d/ots_hmrc_response_to_ots_pensioner_review_interim_report.pdf
Also see Annex A.3 for further information on HMRC and DWP's
planned communications review.
4.39 We recommend that the HMRC/DWP communications review (see
Annex A) includes a review of communications about how the State
Pension is taxed, and clearer information about how tax codes operate
and which documents and figures pensioners need to be aware
of.
4.40 We endorse HMRC's communications work and some of our
committee members have offered to help in shaping and testing the
final communications produced. The timetable for this has been drawn
up. The OTS would like to see improvements in pensioner awareness of
their tax liabilities and how tax is applied, particularly in
relation to the State Pension reviewed as a priority. In addition,
given what we have learned from the research and our consultation
with stakeholders, we suggest the following strands to any further
work in this area:
- improvements to routine communications e.g. forms, annual
notices; and
- provision of better education and support around the time of
retirement.
E. Improvements to routine communications
4.41 The pensioner research and consultations with committee
members have highlighted continuing problems with the layout and
language used in forms and official communications from HMRC.
Box 4.H: Quotation from the OTS
and HMRC commissioned research in relation to communications
from HMRC
“I don‟t understand it. It's not
like I take a letter from Inland Revenue and understand exactly
where they are coming from, they give bands and amounts and
figures all around.”
Male pensioner from the north of England |
4.42 Although the department currently runs a programme of forms
testing with pensioners we feel that more needs to be done. It
remains important that this work continues and we suggest that this
testing needs to be with those who are not knowledgeable about the
system (e.g. those who were the target of our research project) and
those used to dealing with pensioners who are having difficulties
(e.g. members of our Consultative Committee).
4.43 An issue raised by the OTS Consultative Committee was how the
Government's digital strategy relates to pensioner communications
and how best to manage the risks of digital exclusion. The existing
evidence as reviewed in Chapter 3 shows that internet usage remains a
complex issue across the pensioner population.
4.44 Younger pensioners who are more likely to have used computers
in their working lives are more likely to use the internet for
leisure and to conduct financial transactions. However, older and
less affluent groups are less likely to own a computer or use the
internet to conduct transactions. Furthermore, research commissioned
by the DWP10 found that although three-quarters of
pensioners they surveyed who used the internet said they buy goods
and services online, two-thirds said they were not willing to pass on
personal information over the internet. This may mean that even
pensioners who transact online may be wary of doing so in a tax
context.
10
http://statistics.dwp.gov.uk/asd/asd5/rports2009-2010/rrep703.pdf
4.45 This raises the issue of potential digital exclusion of
groups within the pensioner population who may not have access to a
computer and those who are reluctant to conduct transactions online.
We would suggest that this is addressed as part of HMRC's review
of communications and service delivery planning. It seems to us that
pensioners will need non-digital methods for some time to come.
4.46 The OTS endorses HMRC's move to handle the majority of
calls from pensioners in one pensioner centre in Cardiff. This
enables call handlers to build up expertise in dealing with pensioner
queries and should improve the service offered.
4.47 The transition into retirement is a key life event which may
span several years and one which many pensioners manage with little
official guidance. We recommend that HMRC and DWP review of
communications considers providing a pack which makes clear the key
areas of tax pensioners will need to become familiar with; tax codes,
personal allowances and taxation of different sources of income.
Any pack should also include information on their key entitlements
(such as reclaiming tax on savings interest where appropriate,
national insurance and allowances) and their liabilities and
responsibilities (the taxation of the State Pension, the importance
of checking tax codes, notifying HMRC of changes in
circumstances).
F. Form R85 simplifications – getting your interest without
tax taken off
4.48 The R85 form11 enables non-taxpayers to
have the interest on their savings paid gross rather than after the
20 per cent basic rate is deducted. Our review has found that the
rules are not applied consistently correctly, and that many do not
use the R85 and so may have tax deducted unnecessarily.
11http://www.hmrc.gov.uk/forms/r85.pdf
4.49 Where tax has been deducted unnecessarily an R40 form can be
completed to reclaim the tax paid on interest (or to apply the 10 per
cent savings rate). Pensioners questioned during the OTS and HMRC
research found the R40 process off-putting, so improving the R85
process would reduce the numbers needing to reclaim tax.
4.50 The helpsheet12 which goes with the R85
form provides a step by step calculation of a person's tax
liability to help them determine their eligibility – this can
be both time consuming and confusing, leading to mistakes both in
terms of wrongful claims and missed opportunities. The need to carry
out an annual review of the taxpayer's affairs is not made clear
to claimants. This is particularly important to those whose income
may fluctuate around their personal allowance.
12http://www.hmrc.gov.uk/helpsheets/r85-helpsheet.pdf
4.51 The Form R85 itself makes it clear that those completing it
must have read the helpsheet before completing the form, to make sure
they are eligible to do so.13 The research carried
out by HMRC and the OTS found that pensioners were confused by having
two separate papers – if the helpsheet is necessary to complete
the form, why not have it all as one form?
13 Form R85 opens with the statement "To
check whether you are entitled to receive interest without tax
being taken off, you must read R85 Helpsheet for the current tax
year first."
4.52 In January 2013, the Low Incomes Tax Reform
Group14 (LITRG) reported on a “mystery
shopping” exercise into obtaining Form R85 from banks and
building societies. The exercise (though limited by a small sample)
found that deposit-takers performed poorly in terms of giving out
both the R85 and its helpsheet together. In fact, only on 5 out of 52
occasions did their mystery shoppers successfully obtain both the R85
and an up-to-date helpsheet together. Despite the limited sample this
exercise does indicate that practice varies between and within
institutions. In order to ensure greater consistency we would suggest
that the helpsheet should be an integral part of the form, to ensure
that individuals receive the full and correct guidance. We
therefore recommend that HMRC redesigns the Form R85 and helpsheet to
take into account the findings of the LITRG research and make it more
usable for taxpayers. HMRC should also see how it can liaise better
with banks and building societies to ensure that taxpayers receive
the correct information and advice on registering for gross
interest.15
14http://www.litrg.org.uk/reports/R85_report_Jan2013
15 LITRG has produced a report on a small
study into how banks manage the R85 process. Their "mystery
shopping exercise" found evidence of poor understanding of the
R85 process from bank and building society staff and often scant
information on deposit-takers' websites. For further
information on the exercise see http://www.litrg.org.uk/reports/R85_report_Jan2013
4.53 Guidance needs to be better about completing an R85 for one
account whilst having tax deducted from another if the taxpayer is on
the margin of being in the tax net. As it stands, individuals should
only complete the R85 if they are non-taxpayers. They should not
complete it if only some of their savings income falls into their
personal allowance. Some taxpayers on the margin of being in the tax
net have multiple savings accounts. The legislation can be
interpreted as saying that an R85 can be completed for one (or more)
accounts and not for others, the criteria being that the income
should still be under the tax threshold. Some taxpayers follow this
route. HMRC is clear that the R85 is an “all or nothing”:
that individuals should only complete the R85 if they are
non-taxpayers. They should not complete it if only some of their
savings income falls into their personal allowance. We think there is
merit in both routes: the “R85 for some” helps
taxpayers' cash flow; the “all or none” is simpler.
What is needed is clear guidance that sets out the preferred route,
and ensuring that consistent messages are given out.
4.54 A risk of giving out more information about how to get income
paid without tax deducted is encouraging more claims from people who
are ineligible. However, redesigning the R85 to include the helpsheet
as an integral part of the form should minimise this, as it ought to
ensure that individuals understand they should only complete the form
if they are a non-taxpayer. Currently incorrect use of the R85 would
be treated as a compliance issue but we would suggest that the
penalty regime be reviewed to explore how best to manage compliance
issues whilst encouraging take up of the R85 process.
4.55 Finally, HMRC is now developing its future strategy for
communicating with taxpayers, much of which will be
“„Digital by Default”.16 Part of
future communications will include „personal tax
statements' for individuals17 and online
accounts for people to communicate personal tax changes to HMRC. In
order for these statements to give a comprehensive view of
individuals' tax situations; we suggest that taxable savings
income and tax deducted must be included.
16http://www.hmrc.gov.uk/about/2012-digital-strategy.pdf
17 See Budget 2012. "...the Government
will: ... provide from 2014–15, a new Personal Tax Statement
for around 20 million taxpayers. This will detail the income tax
and National Insurance contributions (NICs) they have paid, their
average tax rates, and how this contributes to public spending;
..." http://cdn.hm-treasury.gov.uk/budget2012_complete.pdf
4.56 We also suggest that HMRC should consider how savings income
information will be gathered and included in future communications
with individuals about their overall tax position, and how this might
improve the R85 process in future. Increased automation of the
process ought, in theory, to be possible if best use is made of the
future capability to reconcile data to individuals' accounts.
This is also in line with the findings of the LITRG report.
G. Form R40 simplifications – claim for repayment of tax
deducted from savings and investments
4.57 The R40 form18 is completed to reclaim tax
applied to savings interest and other situations where tax has been
over deducted. It was identified as complex in the interim report and
the OTS and HMRC commissioned research found it off-putting to the
pensioners in the sample. The form asks for the claimant to assess
their income and therefore there are many sections, some of which
relate to very few pensioners e.g. trust and settlement income. This
can be confusing to the pensioner taxpayer population who may attempt
to put information in all sections.
18www.hmrc.gov.uk/forms/r40.PDF
4.58 The OTS subcommittee reviewing HMRC administration found
strong levels of support for an online version of the R40. This
should be a smart form like the SA return which, by asking questions
about types of income, guides the taxpayer to relevant sections and
makes it easier for people to skip sections of income which are not
relevant. Where a taxpayer is registered for self assessment,
submission of a tax return generates an automatic repayment and they
will not need to submit an R40.
4.59 We recommend that as part of the Government's
“Digital by Default” strategy, HMRC should provide the
facility for people in PAYE to submit the R40 form electronically.
The paper R40 should also be revised with clearer headings and
explanations and should be tested with pensioner groups.
4.60 We acknowledge that HMRC has concerns about fraud risks if
the R40 is made available for online submission. However, the
efficiency gain is considerable and the online R40 needs to be pushed
forward.
5 Policy recommendations
5.1 The interim report highlighted a range of legislative
complexities for further exploration. As mentioned in Chapter 3,
there are a number of fundamental changes taking place in the way the
state supports its citizens at vulnerable times of their lives, the
most significant changes being the introduction of Universal Credit,
Personal Independence Payments and the flat-rate State Pension.
5.2 Another major policy initiative of the present Government has
been the increase in personal allowances as mentioned in Chapter 3.
This coupled with previous above inflation increases in the age
allowance (though frozen in Budget 2012) and the popularity of tax
free savings such as Individual Savings Accounts (ISAs) have reduced
many pensioners' income and savings tax liabilities. One
consequence is to limit the effectiveness of allowances such as the
10 per cent savings rate, the blind person's allowance and the
married couple's allowance.
5.3 Our interim report highlighted a number of complex allowances
and reliefs for further review. The allowances and reliefs discussed
in this chapter are often poorly targeted and complex and in many
cases do not benefit the most vulnerable. Where we propose the
removal of such allowances and reliefs it is both to simplify the
legislation and to allow the savings made to be invested in
improvements to improve the process for all pensioners – see
Chapter 4 for our administrative recommendations.
5.4 As highlighted in the Executive Summary, no further review
has been made of the age allowance proposals in this report as the
Chancellor has already decided to freeze, and eventually abolish, the
separate allowances consequent upon the announced increases in
general personal allowances. As this should eventually achieve
simplification the OTS has concentrated on the other policy areas in
the interim report.
5.5 In summary, the key legislative areas for consideration in the
final phase of the review are as follows:
- married couple's allowance;
- blind person's allowance;
- 10 per cent savings rate; and
- MIRAS (Mortgage Interest Relief At Source).
A. Married couple’s allowance
5.6 This allowance was highlighted by the interim report as one
which is highly complex and is only retained for a diminishing group
of older taxpayers. The interim report noted that this was a legacy
of pre-independent taxation (derived from the wife's earnings
election) and it reduced in value throughout the 1990s, with the rate
it was given at reducing from 20 per cent to 15 per cent then to 10
per cent. Married couple's allowance was abolished for all
non-pensioner couples in 1999; they were in part compensated through
changes to the tax credit and benefits system. The allowance was
retained for pensioners only and since 6 April 2000 is only now
available to those born before April1935, therefore the youngest
recipients are now in their 78th year.1
1 Though as the allowance is transferable
between spouses a partner of any age could receive the
allowance.
5.7 The interim report highlighted a range of complexities
surrounding the allowance but the main ones relate to the system of
abatement where the allowance is reduced by £1 for every £2
the income is over £25,400 after first calculating any abatement
of the age related allowance (for the 2012-13 tax year). The other
key complexity is that the allowance is given at 10 per cent rather
than the basic rate of tax and for higher rate taxpayers and those on
middle to high incomes the withdrawal taper or abatement applies.
This produces a reduction of the pensioner's tax liability rather
than a deduction from income and as such it has further complications
– or confusion – compared with those given as allowances
against income. It also means it only has value for pensioners with
enough income to generate a tax liability.
Box 5.A: Married couple’s
allowance worked example
Bertram is a married pensioner. He has a small
occupational pension of £100 per month and savings income
of £400 a year paid gross as well as his state retirement
pension of £8,936. Bertram's personal allowance is
£10,660 because he is 80. Bertram's total income is
£10,536, which is less than his personal allowance. His
wife is a non-taxpayer.
Consequently, the additional married couple's allowance
available of £7,705 which is given as a tax credit of
£770.50 has no value or benefit, as no tax has been
paid. |
5.8 If the allowance is to be given as a deduction against income,
there is some logic in it generating a repayment for people such as
Bertram in the example, but there is no provision for a repayment in
the legislation.
5.9 The interim report also highlighted some peculiarities in the
system, including a divide between couples who married before and
after 5 December 2005. Couples married before this date have the
allowance paid to the husband; if they married or entered into a
civil partnership on or after this date they can elect to have it
paid to the higher earner as the allowance is transferable between
spouses. Consequently the allowance is challenging to claim, and the
system of abatements and obscure rules make it confusing to calculate
and understand. It is a prime source of confusion and error in tax
codes.
5.10 Due to the claimant criteria the numbers claiming it are
inevitably falling each year. The maximum value is £770.50 and
the minimum is £296.00 (from £14.81 down to £5.69 per
week). HMRC's internal analysis2 estimates that
the number of claims has been falling steadily and is likely to be no
more than 500,000 with an average claim of £575 a year. The
allowance is projected to cost £290 million in 2014-15.
2 The information provided by HMRC for this
costing for 2014-15 is based on 2009-10 Survey of Personal Incomes
using economic assumptions consistent with the OBR's March 2012
economic and fiscal outlook.
5.11 We conclude that married couple's allowance is overly
complex, lacks a clear current policy rationale and is unfair to
pensioners under 78 and non pensioners of any age. Logic and
simplification would suggest that the allowance should be abolished
and equivalent support given to relevant older pensioners through
alternative methods such as pensions credit instead. That might be
achieved through a sunset clause which would set a definite date in
the future e.g. Finance Bill 2018 for its abolition and the removal
of all legislation.
5.12 Against this, there is the argument that the married
couple's allowance for all its complexity, is at least
well-established and reasonably well understood (in principle, if not
in detail). It also has something of a built in sunset clause in that
it only applies to those born before 6 April
1935.3
3 Though as the allowance is transferable
between spouses a partner of any age could receive the
allowance.
5.13 Because of this, we conclude that it would be difficult to
abolish the allowance. Instead, the OTS recommends simplifying the
married couple's allowance by turning the allowance into what it
really is – a deduction against tax bills. The current value is
a maximum of £770.50 so we would suggest an amount similar to
this.
5.14 Giving a flat allowance in this way would clearly benefit a
few wealthier pensioner couples who currently receive a rebated
allowance (possibly the minimum £296) but the payback for the
Government would be in terms of much simpler administration.
5.15 The allowance should also be made freely transferable between
couples, eliminating the oddities around marriages and civil
partnerships referred to above.
5.16 We have considered whether the allowance should be made into
a repayable credit. That would clearly add considerably to the cost
(though the cost could be managed by reducing the amount of course).
It also would add administrative complexity as many more couples
would be drawn into making tax reclaims. Although it may be possible
for pensioners in PAYE to have a refund generated through the
reconciliation process. We therefore simply note it as a possibility
but do not recommend it.
B. 10 per cent savings rate
5.17 The 10 per cent savings rate was highlighted as an area of
complexity by the interim report. The savings rate offers a band of
up to £2,710 savings interest a year which can be taxed at 10
per cent rather than the basic 20 per cent. The amount of the
£2,710 rate available at 10 per cent is reduced by £1 for
every pound of income earned above the personal allowance. This rate
was left on the statute after the removal of the 10 per cent income
tax starting rate in 2008 and the explanatory document said this was
“to continue to encourage savings”.
5.18 It is available to all taxpayers who are eligible under the
income limit although as the limit for income is fairly low at
current interest rate levels it appears to benefit people with low
levels of earned income and high levels of savings (given low current
interest rates, any meaningful benefit from the 10 per cent rate
would have to be underpinned by significant amounts of capital).
5.19 The rationale for the tax treatment of this group of savers
is unclear as taxpayers on low incomes are able to use their
Individual Savings Account (ISA) or their personal allowance to
reduce the tax paid on savings. An extra band of lower tax on savings
appears to incentivise only the very wealthy with modest earned
income but large sums of savings income.
Box 5.B: An example of the 10
per cent savings rate
Fernando has earnings from employment of £7,000
and savings income of £4,000 as well as his pension of
£5,587. Fernando's personal allowance is £10,500
because he is 70. Fernando's axable income is £6,087.
The calculation below shows how this is worked out.
Total income £16,587 Less personal allowance £10,500
Taxable income £6,087
Fernando's personal allowance is first used against his
earnings of £7,000 and pension of £5,587 so only
£2,087 (£12,587 - £10,500) is taxable. The rest
of the starting rate limit for savings (£2,710 -
£2,087 = £623) can be used against savings income.
The calculation below shows how this is worked out.
Fernando's earnings are taxable before his savings
income.
Earnings £2,087 x 20% = £417.40 Savings £623 x
10% = £62.30 Savings £3,377 (£4,000 - 623) x
20%= £675.40 Total tax = £1,155.10
Fernando's employer has deducted £416.20 income tax
from his earnings through Pay as You Earn with a manual payroll
(and using Table A, etc). Fernando's bank will have taken
tax off all of his interest at 20 per cent so they will have
taken off £800 (£4,000 x 20%= £800). So Fernando
has paid a total of £1,216.20 tax at source (£416.20
+ £800). But Fernando is only due to pay £1,155.10
tax. This means he can claim a repayment of tax from HM Revenue
& Customs of £61.10 (£1,216.20 -
£1,155.10). |
5.20 The 10 per cent savings rate can be claimed in two ways:
- either through the SA system which will automatically claim the
rate on a taxpayer's behalf via their tax assessment. Many of
those who benefit from the rate may be unaware that they receive
it; and
- those in PAYE must first become aware of the rate, understand
how to calculate and estimate their likely claim and submit an R40
form to reclaim the 10 per cent rate. HM Revenue & Customs'
(HMRC) internal analysis estimates that very few people in PAYE
access the 10 per cent savings rate, creating significant
unfairness.
5.21 In order to explore the complexity of the rate and how easily
it is understood by pensioners OTS and HMRC research tested a
simplified example of the concept.4 The pensioners
in our research sample found it extremely difficult to understand and
struggled to assess their eligibility as these quotations
demonstrate.
Box 5.C: A sample of pensioner
responses to 10 per cent savings rate from the OTS and HMRC
commissioned research:
“I don't entirely understand the 10 per
cent savings rate as I don't entirely understand how you
differentiate savings income from other income. I don't
know whether savings income is pension income.” Female
pensioner from the south of England
“I can't grasp it, it's terrible.... It's not
sinking in. The pension and the savings are two separate
entities, am I right there, how it's taxed? You're now
bringing this into the pension... I would accept what you are
telling me and would accept it from HMRC, but I really
don't fully grasp it, if you want to know the truth, being
perfectly honest with you... There is a block.” Female
pre-pensioner from the north of England |
4http://www.hmrc.gov.uk/research/reports.htm
5.22 Many of the pensioners did not understand interest from
savings as „income‟ so struggled to understand the
eligibility criteria. Many pensioners in our research sample
struggled with who would have enough savings to generate the levels
of savings income discussed while having such a low income. In the
research, even with a very simplified example, this caused
considerable exasperation. Given the levels of confusion and the low
level of take up, we would argue that this rate is not an effective
incentive to save.
5.23 One interim solution would be to mount a further publicity
campaign to encourage those eligible for the rate to claim; this
could be targeted through analysis of HMRC data to identify those
with earnings around the level of the personal allowance. However,
this would be a significant burden for HMRC for little real impact
and wider advertising campaigns are likely to generate as much
confusion as solution, given the involved nature of eligibility of
the rate. We do not think this would be cost-effective and in any
event does not really pass our simplification aim.
5.24 We feel that any savings incentives should be focused
around Individual Savings Accounts (ISAs) as they have high levels of
brand recognition and awareness and are already in place. We would
advise against any changes to the savings tax regime which involve
complicated eligibility calculations or a reclaim process both of
which are key barriers to take up of the 10 per cent savings
rate.
5.25 The OTS therefore recommends that the 10 per cent savings
rate is removed, as awareness and claim levels are so low that it is
ineffective in incentivising savings. Money saved could be used
to make a pragmatic above-inflation increase in the ISA limit.
5.26 The OTS recognises that this recommendation affects people
outside the remit of this review which is focused on pensioners.
However, we cannot see that our conclusions are likely to be altered
by a study of wider age groups: the evidence we have seen from our
researches is likely to be replicated for other age groups. We think
our recommendation is therefore valid as something that will simplify
the system for all taxpayers.
5.27 HMRC estimates5 that there are 525,000
current recipients of the 10 per cent savings rate. The rate is
estimated to cost approximately £50 million with an average
claim of £90 a year. The current maximum rebate claimable under
the 10 per cent rate is £271.00 (10 per cent of the £2,710
rate.) HMRC estimates that the rate will cost £50 million in
2014-15.
5 The information provided by HMRC for this
costing for 2014-15 is based on 2009-10 Survey of Personal Incomes
using economic assumptions consistent with the OBR's March 2012
economic and fiscal outlook.
5.28 Removing the 10 per cent savings rate would be a significant
simplification, but would not be revenue neutral. There are a number
of options the Government could consider if it wanted to make a
broadly cost neutral change. As noted above, one suggestion would be
to introduce a one-off increase in the ISA allowance for pensioners,
to allow them to move savings that would otherwise be taxed at 20 per
cent into a tax free vehicle. The one-off increase in the ISA limit
could be calculated to give a tax saving roughly equal to the tax
raised by abolishing the 10 per cent savings rate. However, as the
current rate is open to all taxpayers a one off increase for
pensioners only would be unfair to other taxpayers who would lose the
rate and would cause considerable complexity for HMRC, banks and
savers in what is currently a simple savings product. Therefore a
general increase in the ISA allowance for all savers would be a
simple and effective way to compensate savers who lose the 10 per
cent rate.
C. Blind person’s allowance
5.29 The OTS's review of tax reliefs6
considered the blind person's allowance. Our conclusion at the
time was that it was poorly targeted, had patchy take up and was
ineffective as a fair way of helping blind or severely sight impaired
people. We recommended that the allowance should be abolished and the
monies potentially available by way of tax relief (were all to claim
it) used to give direct grants to blind/severely sight impaired
people.
6
http://www.hm-treasury.gov.uk/d/ots_review_tax_reliefs_final_report.pdf
5.30 Our recommendation was not followed by the Government. As we
explained in our interim pensioner report, we felt we had to
re-examine this allowance as it was something that was regularly
cited to us as a source of complexity and confusion.
5.31 This allowance is not pensioner-specific but has been
included in the review as the incidence of sight loss increases with
age, and it affects many pensioners. The allowance was introduced as
a late amendment to the 1961 Finance Bill and was intended to help
blind people in work who were considered to have a reduced earning
capability compared to sighted people.
5.32 As blind person's allowance is a tax allowance rather
than a benefit, it is effectively restricted to those with income
above their personal allowance rather than those on the lowest
incomes. On average, people registered blind have very modest
incomes, and often struggle to access employment opportunities.
Pensioners who were blind during their working life may not have been
able to build up a private or occupational pension, and often their
only taxable income is the state retirement pension, topped up by
non-taxable benefits, such as pension credit. If the aim of the
allowance is to recognise the additional demands being blind places
on them over and above many other disabilities then the current
allowance appears poorly targeted. It is worth noting that a
substantial proportion of people with visual impairment also
experience a number of other disabilities as identified by the NHS
report on the Registered Blind and Partially Sighted
People.7
7http://www.ic.nhs.uk/pubs/blindpartiallysighted11
5.33 We spoke to several charities for blind and partially sighted
people about the complexity of claiming the allowance. The current
system in England and Wales8 means that a blind
person needs to be initially certified as blind through their
hospital consultant, then the hospital informs their local authority
and once registered and in receipt of official evidence they can then
contact HMRC to claim the allowance. Registration is also a passport
to other forms of local authority support. Although the blind
person's allowance claim itself can be started by phone;
charities for blind people have indicated that the process of
registration can be a barrier to take up.
8 The eligibility criteria are different in
Scotland and Northern Ireland where the criteria include being
unable to perform any work for which eyesight is essential see
https://www.gov.uk/blind-persons-allowance/overview
5.34 There are approximately 180,000 people registered blind
according to RNIB and HMRC data. Despite the efforts of RNIB and
other similar groups, the take up of blind person's allowance
remains patchy. Based on internal HMRC figures9 on
the current level of claimants there are approximately 37,000 blind
person's allowance claimants, of which 27,000 are pensioners.
This leaves 143,000 people who are registered blind but not receiving
any support from the allowance.
9 The information provided by HMRC for this
costing for 2014-15 is based on 2009-10 Survey of Personal Incomes
using economic assumptions consistent with the OBR's March 2012
economic and fiscal outlook.
5.35 The allowance is currently £2,100 and is estimated to
cost the Exchequer £15 million in 2014-15. The average claim is
worth £440 a year. The allowance can be transferred to a
(non-blind) spouse; a couple where both are registered as blind can
receive two allowances.
5.36 The blind person's allowance (BPA) is currently
£2,100, and if it was replaced by a grant (recognising that most
recipients of the allowance have tax rates of 0 per cent and 20 per
cent) the only group significantly disadvantaged would be higher rate
taxpayers, who are likely to be few in number. It is currently worth
£840 to higher rate taxpayers, but nothing to non taxpayers.
Box 5.D: Blind person’s
allowance worked examples
Agnes is single and registered blind. She has a
small occupational pension of £250 per month and savings
income of £1,800 paid gross as well as her state
retirement pension of £5,587. Agnes's personal
allowance is £10,500 because she is 70. Agnes's total
income is £10,387, which is less than her personal
allowance.
Consequently, the additional allowance available of £2,100
as a blind person has no value or benefit.
Algernon is 58, and registered blind with his local authority.
He has an annual salary of £12,000. So taking the personal
allowance of £8,105, and adding the blind person's
allowance of £2,100, he only needs to pay tax on
£1,795 (£12,000 less the sum of £8,105 and
£2,100). |
5.37 The Government's introduction of Personal Independence
Payments (PIP's) in April 2013 will replace Disability Living
Allowance and target help at people who need additional support due
to illness or disability. These payments are based on the level of
need rather than targeted at particular illnesses or disabilities so
the Department for Work and Pensions (DWP) is unlikely to be able to
administer a benefit for blind people through this scheme.
5.38 The OTS remains of the view that the blind person's
allowance is ineffective in helping the general population of blind
people and that it would be better if it were abolished and the funds
potentially available for tax relief used to provide direct grants
and support to blind people. It has also been suggested that this
could involve grants to buy equipment to enable younger blind people
to enter employment or increased support to access digital government
services.
5.39 If the abolition/grant route is not taken up, we recommend
that the process of claiming the allowance needs to be
simplified. There needs to be a one off exercise to contact all
those registered as blind/severely sight impaired and ensure they are
aware of the allowance and encouraged to claim it if they have
sufficient income. This would be a good example of „joined-up
government‟ in action. Going forward, we agree with
RNIB's proposal that a medical diagnosis of blindness should
trigger an automatic notification to local authorities and HMRC.
This could be administered through the electronic certification of
visual impairment (ECVI) system which has been developed by
Moorfields Eye Hospital.10 After notification the
onus should be on HMRC to help the newly-blind person by giving all
necessary assistance to ensure they have the tax relief if they have
the income. This would include ensuring claimants explore the
possibility of their spouse/civil partner making use of the
allowance.
10http://ecvi.moorfields.nhs.uk/
D. Mortgage Interest Relief at Source scheme (MIRAS)
5.40 Tax legislation relating to mortgage interest relief was
introduced in 1969. The OTS interim report on pensioner taxation
highlighted the complex MIRAS legislation, which was retained when
the remainder of tax relief on interest was abolished in 1988.
5.41 MIRAS relief was abolished for most people in April 2000 but
an obscure relief remains for pensioners who took out a loan to
purchase a life annuity before 1999. Relief for new loans to purchase
a life annuity (normally referred to as home income plans) was
withdrawn from 9 March 1999. Existing plans at that time continue to
qualify for relief. This means that the youngest recipients will
currently be 79. The rationale for its retention is that a pensioner
who had already taken out a life annuity when the rules changed could
not reverse this decision so without this protection could end up
having used up some of the value of their home while receiving little
or even no benefit from this. The end of MIRAS in effect meant the
end of this type of scheme.
5.42 Although some taxpayers still benefit, it does seem that
their continuing benefit is something of an anomaly. Arguably they
have had some 14 years' additional benefit compared with those
buying houses.
5.43 According to HMRC's figures, the numbers of claims are
declining year by year. The latest figures from HMRC show that
£2.25 million of relief was paid in 2003-04 and this had fallen
to £424,000 in 2011-12. Additionally, the value of the benefit
is restricted by statute, and with the best rates charged typically
at around no more than 5.9 per cent given the Bank of England base
rate of 0.5 per cent, it is worth little more than £354 per year
(£6.80 per week). Based on the maximum loan limit of
£30,000.00 and assuming (based on the highest current rates
charged) interest at 7.6 per cent, it is worth a maximum of
£456.00 p.a., or £8.76 per week. Most claimants probably
receive a much smaller tax subsidy.
5.44 OTS research suggests that there is little administrative
burden in maintaining the relief simply because it is
well-established. In fact the OTS has had difficulty in locating
anyone who benefits and indeed anyone in banking, or the tax advisory
profession, who knows of the relief.
5.45 Abolishing this allowance would allow the final repeal of
considerable amounts of legislation dealing with MIRAS. The OTS
therefore recommends that it is abolished, either through immediate
removal (presumably from April 2014) or that a sunset clause is added
ending the relief and thus removing this relief and all remaining
MIRAS legislation at a specified point in time e.g. 2017.
5.46 Consultation prior to abolition should seek out more
information on who actually benefits from the relief and whether a
pragmatic one-off adjustment to interest amounts could be given to
offer compensation for the loss of the relief.
A Interim report – priorities and suggestions
This section includes:
A.1 A table detailing the list of areas for further investigation
and suggestions for short-term improvements from the OTS interim
report, including formal HMRC response.
A.2 HMRC and DWP's update paper on their communication
strategy.
Table A.1 – Priorities list and
suggestions for short term improvements from the interim report with
HMRC’s revised formal responses from January 2013.
| Issue |
Priority rating for
second stage of the OTS pensioner review |
Suggestions for short term
improvements or matters to consider immediately |
HMRC Response |
|
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. |
HMRC does not hold enough
information about PAYE customers' incomes (e.g. interest
they receive on investments) to accurately identify people who
are eligible for age-related allowances. The alternative would
be to write to all customers but as many would not be entitled,
HMRC believes this would cause unnecessary concern and
confusion. |
| 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. |
The notes on MCA have been
reviewed with input from OTS consultative committee members. IT
change timescales mean HMRC will introduce the revised notes by
the end of 2012. This will ensure that all P2 notes are updated
prior to next year's annual recoding exercise. |
| 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 per cent 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. |
HMRC is working with DWP to
provide joined-up information for bereaved customers and
pensioners. Revised information on taxation, including the R85,
will be introduced in an updated booklet which will carry the
same title and a reference code DWP 011. This booklet should be
available from December 2012. It will be available online and
printed copies can be requested from DWP. |
| 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. |
DWP and HMRC has introduced a new
data feed process which electronically transfers details of all
new State pension claims and updates the record automatically
with the amount in payment. This is designed to reduce the
number of requests for information issued to customers and
allows updates to tax codes to be made more quickly and
accurately.
The data feed also provides details of any amendments to the
amount of State pension a customer receives and the uprated
amounts each year.
Receiving this information during the year and applying the
changes automatically to tax codes should negate the need for
final review after the end of the year. |
| 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. |
HMRC is actively reviewing the way
in which it communicates with those approaching retirement age.
In particular, HMRC is simplifying guidance and liaising with
DWP to identify the most appropriate channels for delivering
this guidance. |
| 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'. |
A separate report „Review of
HMRC & DWP tax-related communications for pensioners'
is attached |
| 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. |
HMRC has a project to improve the
R43 form and guidance and will take on board these comments. An
April 2013 update is planned.
HMRC is also reviewing the P53 form which customers use to
claim a tax repayment following trivial commutation.
This will improve the quality of guidance HMRC gives to pension
scheme members, redesign the form and simplify the associated
process for claiming repayment.
On 16 November draft legislative changes for comment were
published in respect of „Tax code applied to certain
commuted pension payments from registered pension schemes',
There is an 11 January closing date for comments. |
| 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. |
On 16 November draft legislative
changes for comment were published in respect of „Tax
code applied to certain commuted pension payments from
registered pension schemes', There is an 11 January closing
date for comments. |
| I. Overseas pensions paid to UK
resident pensioners |
|
|
|
|
| I.1 The 10 per cent 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. |
Since the interim report was
published HMRC and OTS have discussed this in more detail and
agreed that the information on exchange rate fluctuations is an
area outside of HMRC's control.
HMRC's review of communications and guidance will include
the remaining issues. |
| J. Collecting tax –
PAYE |
|
|
|
|
| J.1 Eliminate any errors remaining
in NPS |
|
High |
|
- HMRC is on track to clear all PAYE arrears by the end
of 2012-13.
- On the basis of the information HMRC holds, tax codes
are now over 98 per cent accurate.
- PAYE gets things right in year for 85 per cent of
customers.
- The DWP State pension data feed and the information
supplied from employers and pension providers, especially
with the introduction of Real Time Information (RTI), will
mean that HMRC gets more recent and accurate information on
which to base tax codes.
|
| 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. |
HMRC will continue to review the
P2 process generally to identify and review improvements.
HMRC's intention is to carry out a cost/benefit analysis in
2013 to assess the viability of the introduction of a
„statement‟ to replace multiple P2 Coding
Notices. |
| 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. |
The DWP State pension data feed
and the information supplied from employers and pension
providers will mean that we get more timely and accurate data
on which to base tax codes.
The automated state pension data feed includes a daily update
to HMRC of amounts paid to new state pension recipients and
changes to amounts in payment by DWP. DWP also send an annual
file of the following year's amount for each recipient of
state pension to enable an accurate tax code to be calculated
for the next tax year. Both the daily and annual updates will
trigger automated tax code calculations.
The introduction of RTI provides an opportunity to build on
this in the future.
The PAYE Regulations have been amended to provide for RTI, and
occupational pension payers will have to deduct PAYE under RTI
in the same way that they do now. |
| 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‟. |
- HMRC continues to look at potential changes to the
process.
- HMRC are considering changes to the P800 form. The
changes based on feedback from customers are designed to
present information in a clearer, more simpler way.
- This year HMRC started the reconciliation process for
the tax year ended April 2012 two months earlier than
previous years so that many customers will get their money
back quicker. This also provides certainty sooner for those
who have additional tax to pay.
- Where tax is underpaid, HMRC usually recovers the
underpayment automatically in 12 monthly instalments over
the subsequent tax year through the customer's annual
tax code. Where this causes financial difficulty, people
may be able to spread the payments over a longer period (up
to 3 years).
|
| 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. |
HMRC does not have the data
necessary to carry out this review. |
| J.7 Determining pensioners'
PAYE codes and form P161 |
|
High |
|
HMRC has recently reviewed the
purpose of the form P161 and changed this into an Age Allowance
request, as HMRC now receives information about State pension
and occupational pension from elsewhere. The new version of the
form was developed in consultation with customers and is now
available. |
| K. Collecting tax – self
assessment |
|
|
|
|
| K.1 Self assessment –
operational improvements |
|
High |
|
HMRC wants to try to ensure that
Self Assessment (SA) only includes customers who need to be in
it and that the SA criteria remain relevant and up to date.
This year, under a new initiative, HMRC has invited people who
don‟t think they should be in SA to contact them –
as a result, over 330,000 customers have been taken out of
SA.
The pre-population of SA returns is something HMRC is
interested in exploring. Further analysis of the costs and
benefits is required. |
| L. Support for bereaved
taxpayers |
|
|
|
|
| L. Support for bereaved
taxpayers |
|
Low (but we endorse ongoing
work). |
|
HMRC has worked closely with tax agents, tax charities and
listened to customers to introduce a series of improvements
to enhance customers' end-to-end experience of dealing
with HMRC. The improvements include:
- a priority telephone service for bereaved
customers
- a single Post Office Box address for people on PAYE and
SA matters relating
- a dedicated team which is responsible for processing
the main form which customers use to finalise a
person's estate to bereavement
- a redesigned bereavement form with supporting notes
which is easier for customers
- updated standard letters for customers following
bereavement with improved style, tone and clarity
- an online bereavement guide so customers can now answer
a series of questions relating to the person who has died
and receive tailored information about what they have to
do
- an improved process to speed up the agent authorisation
process
- early (in year) settlement for Self Assessment
customers
HMRC is continuing work in this area on improvements in
the quality of our call handling; increasing the efficiency
of our processes; and joining up relevant services across
HMRC.
|
| 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 |
|
Recent research commissioned by
HMRC has given a much better understanding of customers who
could do with more help if they are to get their tax right and
claim their entitlements. That understanding is being used to
help design a better service for those customers that more
closely reflects their needs. |
| N.2 Digital exclusion |
|
High |
|
Government's “Digital by
Default” Strategy means ensuring all new services are
designed from the outset to be delivered digitally, and
re-designing existing services in the same way, when the
opportunity arises. HMRC is looking at the support needs of
people who are less able or unable to use online services and
will factor this into the design of services for customers with
the greatest need. |
| 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
Inability to use free online filing software to submit
Residency pages
Navigation and simplification of guidance |
|
Low (but we would welcome further
submissions as regards problem areas). |
HMRC should review the problems
noted in the report to see if any improvements can be
delivered. |
The associated costs mean HMRC
does not plan to introduce a facility to permit non-UK
residents to file online.
Receiving this information during the year and applying the
changes automatically to tax codes should negate the need for
final review after the end of the year.
HMRC is exploring this as part of the general consideration of
communications and guidance. |
Review of HMRC & DWP tax- related communications for
pensioners
Introduction
In the Interim Report of their Review of Pensioner Taxation, the
Office of Tax Simplification (OTS) suggested that HMRC and the DWP
should review the current information provided to pensioners, and
noted the benefit that would be gained from more coordinated working.
HMRC and DWP responded by identifying key individuals with the
appropriate policy, strategic and operational knowledge to
participate in a review of communications. They formed a steering
group to review pensioner communications and report back to OTS. This
report sets out the outcomes of this work.
The Pensioner Tax Communications Closer Working Group first met in
September 2012 with a remit to review, discuss, agree and co-ordinate
communications by HMRC and DWP which relate to tax for pensioners and
pre-pensioners. The aim was to ensure consistency of approach by both
departments and to deliver improved clarity of understanding for
customers. The Group accepted an ongoing role to facilitate continued
joint engagement beyond the OTS review.
What we did
Between September and November 2012 HMRC and DWP carried out a
review of the tax messages provided for pensioners. The review sought
to consider the extent to which communications carried appropriate
messages about tax, and to look at any amendments or improvements to
provide more effective messages for customers. The review
specifically considered:
- DWP leaflets and forms
- DWP’s web content hosted by gov.uk
- HMRC’s web content aimed at pensioners on both
HMRC’s website and gov.uk.
It did not look at HMRC forms as key forms were being considered
separately. HMRC do not currently provide any leaflets specifically
for pensioners, although a web version of IR121 (Approaching
retirement – A guide to tax and National Insurance
contributions) currently exists. That was considered alongside other
web content.
DWP leaflets and products
The review considered the products, leaflets and website material
relating to tax for pension age people provided by DWP. Starting from
the customer perspective, DWP and HMRC staff worked together to
identify the relevant contact points within State Pensioners’
customer journeys. They considered the various channels and media
that customers use and the key communications products that they
encounter.
A working group then reviewed the existing information and made
recommendations for improvements in signposting and in raising the
profile of tax messages. The aim was to present changes which could
be considered at the next point of review for each of the products,
and could, wherever possible, be accommodated within existing budgets
as business as usual.
Internal stakeholders in both departments were consulted before a
final list of possible amendments was produced. DWP have provided a
timetable for review of this literature. The actual text will be
subject to further review as part of the process for agreeing changes
in line with this agreed schedule. The majority of changes should be
delivered by April 2013.
A key product considered as part of the review was the State
Pension annual uprating letter and supporting notes. The review
identified opportunities to improve the prominence and wording of the
tax messages carried in the supporting notes, which DWP are currently
progressing with the Office of Tax Simplification.
Alongside this work, HMRC and DWP worked together to review
literature relating to bereavement. DWP’s leaflet DWP 1027
(What to do after a death in England or Wales) was revised and a new
leaflet with the same title (reference: DWP 011) will be published in
December and printed versions are available on demand.
Our wider review of customer journeys confirmed that DWP’s
products do carry relevant tax messages and signposting to HMRC -
from the point where a customer requests a State Pension Statement
(formerly forecast) through to a State Pension/Pension Credit claim
closure. In some products, though, these messages were difficult to
find. The recommendations therefore included moving tax messages to
earlier points in key documents.
One leaflet, SPD1 (State Pension Deferral – your guide) was
not reviewed in full. It was agreed that there was scope for a more
fundamental review and this will be considered in the next business
year.
gov.uk
The review co-incided with the introduction of gov.uk on 17
October 2012. gov.uk replaced directgov and is the sole
website for DWP related content for pensioners. Reviewers were able
to work with DWP and gov.uk to enable key tax messages and
links in the area of the site relating to pensions and benefits.
These pages now contain a clear statement that State Pension is
taxable and links across to the HMRC pages which relate to pensioners
and tax.
gov.uk also contains a limited amount of HMRC material
– HMRC’s website is due to migrate as part of a later
phase. The review looked at this material and has made suggestions to
correct factual errors (e.g. in understanding how State Pension is
taxed) and to improve the messages so that they more closely meet
customer needs. Work continues to refine the pensioners and tax
information provided on the gov.uk website.
HMRC’s website
The review provided input into HMRC’s annual review of their
pensioner website pages. Revisions and suggested amendments have been
passed to HMRC’s digital communications team to be reviewed and
where appropriate, incorporated. However the HMRC site is due to move
to gov.uk in December 2013 and so the focus for significant
work in the months ahead will be in simplifying the content and
providing clear briefing to the gov.uk web authors.
Recommendations
Specific recommendations for wording changes have been taken
forward by each department to evaluate and determine whether they can
be implemented as part of:
- business as usual changes or
- future planned change programme activities
These include changes to the HMRC website and gov.uk pages -
changes to the gov.uk pages relating to DWP material have
already been implemented.
The review also identified several specific issues that require
further consideration by the relevant department:
- HMRC will need to consider how it can meet demand for printable
information on tax for pensioners – either by updating the
pdf booklet IR121 or creating clearly printable web pages for each
topic.
- Consideration of HMRC providing additional communication around
the taxation of the State Pension. Although the review found that
tax messages were being included, awareness remains low, suggesting
that alternative routes for providing this information could
usefully be explored. We know many pensioners do not actively seek
this information so need to consider innovative ways to get
information to individuals when it is most relevant.
- Looking at whether there is scope to improve links with the
voluntary sector – including Tax help for Older People and
Tax Advice for Pensioners Service.
- The need to continue work to simplify HMRC’s online
pensioner material to enable a smoother transition to gov.uk
in due course.
Conclusion
Recommendations for improved messages are being taken forward by
HMRC and DWP. The changes will mean that customers have relevant tax
messages at appropriate points as they begin considering claiming
State Pension, making a claim, and receiving updates and
statements.
Effective links have been developed between HMRC and DWP which
enabled the review to be carried out in a very short timescale.
HMRC and DWP will continue to use the key links and governance
arrangements created for this review to support ongoing dialogue so
that the benefits of a joined up approach are not lost. The Group
will continue to meet to review progress and scan for new issues.
Pensioner Tax Communications Closer Working Group
26 November 2012
B Analysis and provisional costing assessments from HMRC and the
DWP
This section includes:
B.1 HMRC's internal analysis paper on the numbers of state
pensioners in self assessment.
B.2 HMRC estimate paper on the costs of OTS policy
recommendations.
B.3 DWP internal analysis paper on the potential impact of taxing
the State Pension at source.
B.4 DWP internal analysis paper on the potential impact of
producing a DWP60.
December 2012
Knowledge, Analysis and Intelligence
‘Pensioners in SA’
Introduction
This note examines emerging HMRC KAI analysis on „Pensioners
in SA‟ i.e. “People receiving the State Pension who file
an SA return” (in this case, in 2010-11).
So it will include people who have declared a State Pension income
who are either, non-taxpayers, liable to tax, or taxpayers claiming a
repayment of excessive tax deductions.
And exclude people who are due a state pension in 2010-11, but
have opted to defer the payment of that pension until a later tax
year.
We investigate the reasons for which these individuals are filing
an SA return.
It is important to note that once a single reason to file is
identified, a complete SA return must be filed covering all income
sources. This can lead to relatively small amounts of income being
declared, which considered under their own criteria would not need to
be. A widespread example of this is bank and building society
interest.
Data
For this analysis we have used the full data extract of SA returns
as stored on HMRC's administrative systems. At the date of
extract, the 2010-11 SA returns were estimated to be 93% complete so
we make an adjustment to take into account those yet to file a
return. We assume that there is no significant difference between
those already filing and those yet to file so apply a simple grossing
factor (effectively 1/0.93) across all cases.
Results
There are, as far as we can identify, 15 reasons for being in SA.
They are as follows:
1. Tapered Age Allowances
2. Ministers of Religion
3. Self-Employed
4. Partner
5. Lloyds Underwriter
6. Land and Property
7. Foreign Income
8. Trust Income
9. Capital Gains Tax
10. Residence and Domicile
11. Additional Information
12. Savings and Investments
13. Directorships
14. Expenses and Reliefs in employment
15. Total Income over £100,000
Table 1 (overleaf) shows a breakdown of the reasons for filing an
SA return.
Table 1: People receiving State Pension
in SA 2010-11: Why are they on SA?
|
Number of criteria
met for being in SA |
| Reason for being in SA |
None |
1 |
2 |
3 |
4 |
5 or more |
All |
| Tapered Age Allowances |
- |
305,092 |
271,231 |
164,678 |
79,193 |
59,780 |
879,974 |
| Ministers of Religion |
- |
1,716 |
1,352 |
564 |
159 |
57 |
3,848 |
| Self Employed |
- |
173,132 |
107,054 |
42,225 |
16,695 |
13,761 |
352,868 |
| Partner |
- |
70,194 |
57,656 |
30,046 |
13,618 |
12,587 |
184,100 |
| Lloyds Underwriter |
- |
58 |
197 |
271 |
315 |
1,523 |
2,365 |
| Land and Property |
- |
92,884 |
90,660 |
59,751 |
29,592 |
25,618 |
298,505 |
| Foreign Incomes |
- |
39,028 |
67,982 |
70,113 |
46,156 |
46,689 |
269,968 |
| Trust Income |
- |
2,977 |
5,625 |
5,970 |
4,717 |
7,153 |
26,442 |
| Capital Gains Tax |
- |
14,980 |
31,620 |
36,804 |
31,443 |
40,349 |
155,196 |
| Residence and Domicile |
- |
6,789 |
8,298 |
4,393 |
2,113 |
1,955 |
23,548 |
| Additional Information |
- |
50,828 |
149,871 |
93,891 |
49,027 |
45,057 |
388,674 |
| Savings and Investments |
- |
23,729 |
52,102 |
54,516 |
37,489 |
41,464 |
209,299 |
| Directorships |
- |
22,179 |
27,470 |
34,251 |
20,874 |
18,929 |
123,703 |
| Expenses and Reliefs |
- |
727 |
1,461 |
1,316 |
1,516 |
2,137 |
7,156 |
| Total Income over 100k |
- |
3 |
3,839 |
8,721 |
10,567 |
22,962 |
46,093 |
| Totals |
411,280 |
804,314 |
438,209 |
202,504 |
85,869 |
60,889 |
2,003,065 |
N.B. the columns will not sum to the column totals. This is
because individuals are counted twice if they meet two criteria, four
times if they meet four criteria. The row totals are definitive
numbers of individuals.
As seen in table 1, there are approximately 2 million
„pensioners in SA‟ of which 411,000 meet none of the
criteria for being in SA. These are candidates for simplifying
their affairs and we will come back to these later.
Of the remaining 1.59 million, around 51%, or 804,000 have just
one reason for being in SA; the other 788,000 have multiple
reasons for which there is little prospect of their being able to
leave SA.
So looking at the 804,000 with only one reason for being in SA,
just 305,000 are in SA solely because of the tapered age
allowances. Everybody else in the group claiming age related
allowances has at least one other reason for being in SA and
therefore not likely candidates for removal from SA.
So from 2 million pensioners in SA, we
are left with:
- 411,000 with no statutory reason to be in SA
- 305,000 who are in SA solely because of the Tapered Age
Related Allowances
These individuals do not satisfy any of the criteria we think
cover everyone that should be in SA. Early indications show that
there are a number of reasons this group exists:
1. Some are using the SA system as a means of recovering
overpayments (i.e., a simpler, more comfortable substitute for the
Claims system)
2. Some have been filing SA returns for years and continue to do
so even beyond the stage that they are required to do so.
The majority of this group – 279,000 (305,000-26,000) are
subject to the tapered Aged Personal Allowance acting on net incomes
above £22,900.
There is also a small group of around 26,000 that are subject to
the Married Couple's Allowance taper that currently extends
upward from the point that the Age Related Personal Allowance runs
out (£29,230 for 2010-11). This group will not be removed by
the changes to the Personal Allowance, but it will slowly reduce over
time due to mortality and there should be very few new claimants for
MCA.
HMRC Response to OTS’s policy
suggestions on costs of suggested recommendations.
Information on the costs/ benefits of the OTS’s policy
proposals on:
1. Blind Persons Allowance (BPA)
2. Married Couples Allowance (MCA)
3. 10p Starting rate for savings
Customer and yield impact analysis
Information is for 2014-15 for all individuals. This is based on
the 2009-10 Survey of Personal Incomes using economic assumptions
consistent with the OBR’s March 2012 economic and fiscal
outlook.
1. Abolition of BPA is estimated to yield around £15m
(rounded) in 2014-15. This would affect 37,000 individuals, each with
an average loss of £440.
2. Abolition of MCA is estimated to yield around £290m
(rounded) in 2014-15. This would affect 500,000 individuals, each
with an average loss of £575.
3. Increasing the starting rate for savings from 10p to 20p would
yield an estimated £50m (rounded) in 2014-15. This would affect
525,000 individuals, each with an average loss of £90. Please
note that the majority of taxpayers in contact with HMRC only via NPS
(National PAYE System) are assumed to be unaffected as they do not
currently make a claim for the differential between the 20p TDSI (tax
deduction scheme for interest) and the current 10p starting rate for
savings and so are not included in the estimate above.
Administrative costs
On the basis of the high level analysis we have been able to
conduct, all three changes would carry costs up-front to HMRC to
change our IT and forms (in particular the paper and online self
assessment return). We would also need resource to respond to contact
from individuals affected by the changes. Pensioners are the customer
group most likely to contact us in response to a communication and we
believe this would be particularly true amongst the older group who
would be affected by the removal of Married Couple’s Allowance.
There would be small savings over the longer term from each change
through a reduction in processing, calls and letters. However our
funding arrangements would not allow us to offset these savings
against any investment in IT change.
We have also looked further at the implications of DWP introducing
a P60 style document and, again given the propensity of the pensioner
population to contact us by telephone for confirmation and
re-assurance; this change would result in a cost to HMRC rather than
a saving. We would anticipate that call volumes would decline if the
P60 document became a regularly issued mailing but remain generally
higher amongst pensioners than for other customer groups.
MIRAS (Mortgage Interest Relief at
Source)
The table below represents repayments to MIRAS providers - home
owners get relief at source when they make payments and the providers
claim the tax back. The details below do not give the numbers of
pensioners involved but show the steady reduction in relief.
| Year |
No. of claims |
Total amount repaid |
| 03/04 |
102 |
£2.25m |
| 04/05 |
114 |
£2.5m |
| 05/06 |
Can't find the numbers |
|
| 06/07 |
90 |
£1.5m |
| 07/08 |
89 |
£1.7m |
| 08/09 |
83 |
£922k |
| 09/10 |
86 |
£612k |
| 10/11 |
83 |
£630k |
| 11/12 |
80 |
£424k |
Outcome note on taxing State Pensions at
source for the Office for Tax Simplification Operational costs and
risks
The Department for Work and Pensions has explored the impacts of
taxing State Pensions at source and has concluded that this would be
a major change with considerable implications for the Department. The
costs of operating tax at source are substantial, largely due to the
operational costs of processing and enquiries, as well as the need to
amend a number of IT systems to enable taxation functionality.
The DWP is already committed to a significant programme of reform
and introducing tax at source would place considerable strain on its
capacity to deliver these commitments. HMRC has expressed concern
over the scale and complexity of taxing State Pensions at source,
particularly with regard to tax codes, and believe there would be a
high risk of error. This would be detrimental to pensioners and pose
a reputational risk to the DWP. In addition, the RTI data link
between DWP and HMRC would be unable to cope with the volume of data
transfers required to tax State Pensions at source.
There are questions about whether introducing tax at source would
risk disturbing the position of the majority of state pensioners who
are largely content with the current system of deducting tax from
their private pension, or indeed who prefer to submit a tax return
via self assessment.
Policy Implications
In addition to the costs and risks above we have reservations that
taxing State Pension at source would be cost effective because of
changes to State Pension policy which shifts the responsibility of
earnings related pensions from the state to the individual. Outcomes
from the state are set to decline over time in line with a long term
overall reduction in pension income from the state. This is
attributable to three main factors:
- State Additional Pension is falling in real terms because of
the reduction of accrual rates in SERPS and S2P and the removal of
earnings relation in State Second Pension – to the point that
in an unreformed system earnings relation would be withdrawn
entirely by the 2030s. Changes such as this happen only slowly for
instance the maximum theoretical amount of Additional Pension at
State Pension age now is £1621, by 2030 this
amount will be £140. But we estimate that the average amount
of net State Pension (basic State Pension and Additional Pension
less any contracted out rights) will be around £129 in 2015,
£134 by 2025 and £139 by 2030 – below the current
personal tax limit of £1552 a week.
- The Government is preparing a White Paper for publication on
the single-tier State Pension which would replace the current two
tier system. Although no decisions have been made regarding the
level of the single-tier pension the objective for the policy is to
provide an almost universal flat-rate pension above the level of
the weekly means test. The single-tier pension will mean that in
future most pensioners would reach State Pension age with State
Pension incomes within the current personal tax allowance.
- The number of people reaching State Pension age with net
State Pension above the current personal tax allowance will reduce
in the next 20 years as the cohorts who contracted out of
Additional Pension work themselves through the system (the numbers
are not likely to peak until the early 2030s and it should be noted
that by that time the majority of people, over 80%, will have a
reduced State Pension because of contracting out provision).
1 This assumes that contributor had earned at
the Upper Earnings Limit (Upper Accrual Point from 2008) for each
year in their working life from age 16 to State Pension age.
2 In this paper we have used a Personal
Allowance of £8,105
Pension Credit and the tax system
Paragraph 3.106 of the OTS interim report describes an issue
concerning the calculation of Pension Credit. In brief the Pension
Credit means test calculation takes into account income net of tax.
However, Pension Credit claimants who have a tax liability and who
have this collected through self assessment will not be able to
provide a net income amount at the point of claim. As a result their
income will be overstated and they will receive less Pension Credit
than their entitlement.
Following representations from the Low Incomes Tax Reform Group,
DWP now alerts customers through leaflets, claims packs and DirectGov
to provide their annual tax liability as part of the claims process
and this would be included in the overall weekly Pension Credit
assessment. Any adjustments to take account of revised liability can
be made should the claimant report a change.
The Guarantee Credit of £142.70 for single people
(£217.90 for couples) is within a Personal Allowance of
£155 and in straightforward claims it seems unlikely that
pensioners with a tax liability would also be entitled to Guarantee
Credit. However, Pension Credit has a series of premiums (for carers
and people with disabilities and for people with certain housing
costs) which can lift the applicable amount in Pension Credit above
the income tax Personal Allowance. In addition, people may be
entitled to the Savings Credit element of Pension Credit (where the
current taper end point is around £190). Some taxpayers may well
be brought into Pension Credit entitlement through a combination
Savings Credit and premiums.
It is difficult to accurately assess whether these particular
issues will continue into the long term. For instance, the DWP Green
Paper on the single-tier pension proposed that the Savings Credit
should be withdrawn for people who retire into the single tier and a
key objective of the single tier is to ensure that as many people as
possible retire on an income above the Guarantee Credit. We are not
aware that the current arrangements are presenting difficulties and
it may be useful (if possible) for external stakeholders involved in
the OTS work to inform HMRC of examples where customers have been
disadvantaged because of their tax arrangements.
Annex
1. Three of the Department's IT systems and two interfaces
would require substantial amendments to enable tax functionality and
future IT platforms would require additional functionality.
2. DWP would also be required to produce an end of year statement
for every state pensioner at substantial cost.
Outcome note on DWP issuing a DWP P60
(equivalent) to State Pensioners for the Office for Tax
Simplification
Scope
The Department for Work and Pensions has explored a number of
options to develop a DWP P60 (equivalent) statement that would
provide State Pension customers with details of the amount of taxable
benefits they were entitled to during the tax year. As part of the
scope for this work DWP considered the requirement to trigger
statements, both at the end of the tax year and/or following an award
closure.
The options explored to address these requirements are as
follows:
1. Paper statement issued automatically to all State Pension
customers.
2. Paper statement issued only on request from a customer or
representative.
3. An electronic statement that the customer could access and
view on-line.
4. Utilising existing products. For example, the State Pension
uprating letter.1
1 uprating letter that is issued to all State
Pension customers annually advising them of their State Pension
entitlement from April for the year ahead
Summary of Operational Implications
The DWP considered the impacts of each of the options to develop a
DWP P60 (equivalent) statement and has concluded that this would be a
major change with considerable implications for the Department. All
options included fixed set up costs to establish and maintain records
for all 12million pensioners.
The costs of developing the DWP P60 (equivalent) statement are
substantial. This is largely due to the changes required to a number
of IT systems; increased operational processing costs where full
automation cannot be achieved, and additional customer enquiries
generated on receipt of the statement.
- For each of the 4 options above, three of the Department's
IT systems, one interface and future IT platforms would require
substantial development work to introduce functionality to enable
an accurate statement of taxable benefits to be produced.
- The Department's experience is that pensioner customer
groups will contact the originator of the letter, even when advised
no action is required or signposting messages are incorporated. The
Department expects millions of customer enquiries as a result of
placing a greater administrative burden on DWP Operations. As DWP
are not specialists in the tax system there is a significant risk
the volume and complexity of additional enquiries could have a
detrimental effect on the overall service provided to all
pensioners, disproportionate to those pensioners requiring the P60
(equivalent) information for self assessment purposes.
Additionally, HMRC have advised that it would expect to see a
proportion of queries to be received into HMRC call centres. Based on
historical data, correspondence to pensioners that includes new
information about a change involving tax can generate up to 20% of
calls based on the total number of letters sent.
Although no timescales have been indicated for the introduction of
the P60 (equivalent) statement, the Department is already committed
to a significant programme of reform and developing a new
notification of this scale and complexity would suggest any delivery
date would be no earlier than 2017.
Policy Implications
Our note on DWP operating PAYE at source described how State
Pension incomes over time will become increasingly flat rate. This is
happening at the moment because earnings relation is gradually being
withdrawn in State Second Pension – and the Government intends
to publish a White Paper in the autumn setting out its plans for
single-tier pension set at fixed amount above the level of the
Standard Guarantee Credit.
While State Pension outcomes will increasingly be below the annual
personal allowance, and the numbers self assessing purely because
they have little other income apart from State Pension will decrease,
people will still need accessible information about their taxable
State Pension. While the costs of automatic notifications described
above may not be proportionate we will want to look for
opportunities, especially as we change systems to make way for the
single tier pension, to improve customer accessibility.
Next Steps
Whilst the DWP concluded that development of DWP P60 (equivalent)
would be prohibitively expensive to introduce on existing IT systems
and place a greater administrative burden on its operations, it has
not ruled out that there are opportunities to explore and identify
customer service improvements. We would continue to work with HMRC
and OTS to improve our existing processes and products, looking to
enhance the quality of information and service provided to State
Pension customers.
C The OTS review of pensioner taxation
Table C.1: Members of the review of
pensioner taxation – Consultative Committee
| Committee member |
Organisation |
| Ciaran Arthurs |
Advice NI |
| Malcolm Booth (appointed in Oct
2012) |
National Federation of
Occupational Pensioners |
| Sally Ferguson |
Tax practitioner |
| Bob Harris |
ICAS and McLellan Harris &
Co |
| Peter Holland |
HM Revenue & Customs |
| Camilla Metcalf |
HM Treasury |
| Patrick Millard MBE |
LITRG and Tax Help for Older
People |
| Jane Moore |
ICAEW |
| Mary Pattison |
Department for Work and
Pensions |
| Graham Sherburn |
Tax Help for Older People |
| Matthew Stephens |
Prudential |
| Kelly Sizer |
Low Incomes Tax Reform Group |
| Roger Turner (retired in Oct
2012) |
National Federation of
Occupational Pensioners |
| Karen Thomson |
Chartered Institute of Payroll
Professionals |
| Mike Warburton |
Grant Thornton |
| Sally West |
Age UK |
| Angela Williams |
Tax practitioner and ex-OTS |
Table C.2: 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.
|