Tax on pensioners - time for change

LITRG speculates whether change might finally be seen in HMRC’s handling of pensioner tax following the recent Public Accounts Committee report.

The PAC report

The Public Accounts Committee (PAC) is an influential committee of MPs whose remit is partly to scrutinise Government systems to ensure they give value for money.  Following on from a National Audit Office (NAO) report late last year, the PAC has held an enquiry into pensioner taxation, on which they have now reported.

How the PAC report fits in with LITRG’s long-running pensioner campaign

One of the Low Incomes Tax Reform Group’s first ever projects was to examine the tax problems of pensioners, culminating in publication of our December 1998 – ‘Older people on low incomes - Case for a friendlier tax system’.  Out of a LITRG pilot, the independent charity TaxHelp for Older People was born and since then, we have produced other reports on pensioner tax issues, the latest focusing on bereavement – not a subject exclusive to pensioners but one which naturally relates most closely to that section of society. 

A consistent theme in our reports has been that pensioner tax needs to be dealt with correctly from the start – ‘retirement’ is a key trigger, loss of a spouse or civil partner might be another.  If HMRC were to handle these life events efficiently, then everything else should run smoothly.  

As part of the PAC enquiry, LITRG therefore submitted evidence as to the complexity of completing HMRC’s pre-pensioner form – the P161.  HMRC issue this form to those approaching state retirement age in an effort to determine what income the pensioner will have and how tax can be collected on the various sources.  It also aims to enable individuals to claim age-related personal allowances.  But pensioners frequently do not understand the purpose or importance of the form and HMRC’s accompanying guidance notes fail to adequately explain what information is required.  Consequently many fail to complete it accurately (if they complete it at all), which can lead to incorrect tax deductions.  A version of the form is also issued following the death of a spouse or civil partner.

We have tried for several years to have the P161 removed in favour of an automatic grant of age allowances at age 65, which we feel is achievable by HMRC and DWP matching pensioner data – a recommendation now supported by the PAC report.  

A way forward?

It really does seem now that serious attention will be paid to the tax problems that confront pensioners, with the PAC calling upon HMRC to ‘establish a clear plan by June 2010’.  We welcome this renewed focus, particularly given that pensioners are forming an ever greater proportion of the total population, so the numbers affected are on the increase.

We will continue to press for these changes to become a reality.  One important factor to take into account will be the capability of HMRC’s new National Insurance and PAYE Service (NPS), which has so far been dogged with problems in this year’s PAYE Coding run, with pensioners amongst those hardest hit by incorrect codes.  We hope that once those problems have been cleared, NPS will provide a solid foundation on which to move forward and simplify pensioners’ tax. 

Useful links

You can read LITRG’s full submission to the PAC Enquiry on the group’s website.

Article Added Thursday, 11 March 2010

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