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We have already commented over the last year that those on the lowest incomes will have a significant rise in their tax bills from 6 April 2008.

Increase in tax charge

Just to recap on why this is happening. From 6 April 2008 the 10% starting rate for tax is abolished. At the same time the basic rate is reduced from 22% to 20%.

If you are on a low income the benefit of the latter change is outweighed by the removal of the 10% band. That will result in people whose annual income is around £15,000 or less paying more tax from 6 April than they are now.

For example:

Income            Tax/NI in 2007/08            Tax/NI in 2008/09

£7,000                375                                  482 

£10,000              1311                                1412

£15,000              2961                                2962

£30,000              7911                                7612

The alleged tax credits offset

Press reports suggest that increased tax credits will offset these tax rises. But there are many in this situation who are not entitled to tax credits, and many others who are eligible but do not claim them.

For a start, any childless person under 25 years of age without a disability is not eligible for working tax credit.  Within that broad category are many in need of support, in particular:

• school-leavers searching for their first employment;
• those leaving university with loan debt.

Examples of others who are not eligible for working tax credit are:

• most childless people of 25 years of age and over who work less than 30 hours a week;
• anyone who works less than 16 hours a week;
• people coming off incapacity benefit and entering work, but not able to work for the requisite number of hours each week;
• migrant workers whose immigration status prevents them from having recourse to public funds

Pensioners

Pensioners aged 60 to 64 lose out because they do not benefit from the big increase in the age allowance for the over-65s, which is meant to compensate for the loss of the starting rate. The problems don't stop there, however.

Case Study

In another of our series of case studies, we examine the case of a taxpayer failing to receive the benefit of the 10% band  – worth around £200 a year.  Although this tax band is being abolished for earnings and pension income from 6 April 2008, it will still exist for savings income.

This case also demonstrates the inconsistency in current HMRC practices.  Why should a tax repayment be issued to a customer one year, entirely unprompted, but not for subsequent years? 

Background

Mrs B, aged 70, came to TaxHelp for Older People (TOP) to check she was paying the correct amount of tax on her income.  She works part time in order to supplement her income, which otherwise consists of the state pension and a small occupational pension.

What happened?

Mrs B’s main source of income is her part time job, which pays her just over £5,000 a year.  But HMRC were treating her occupational pension of around £2,500 a year as her primary source of income.  Due to the way in which PAYE Codes were then allocated, she was paying too much tax each year by not receiving the benefit of the 10% band (paying tax on all her earnings at 22%). 

HMRC had reviewed her records for 2003/04 without being asked and issued her a repayment of £102.  Since then, Mrs B had received PAYE Coding Notices from HMRC but nothing else. 

The TOP volunteer advised Mrs B that she was due a total tax refund of £420 for 2005/06 and 2006/07 and helped her send her claim off to HMRC.  She may also have been due a repayment for 2004/05 but she was unable to locate her P60s; so HMRC were asked to review her records for that year. 

Why did this happen?

This happened because HMRC systems are not rigorous in producing annual reviews and when a review does take place it is done in the context of a single year.   HMRC should have taken the opportunity when they found the overpayment for 2003-04 to check the correct allocation of codes for the following year to ensure the overpayment did not recur, but they did not. Pensioners can never assume that HMRC will act in their best interests and it is always wise to challenge something that you do not understand. 

In other cases, where the 10% band is used against savings income – such as interest on a bank account, a tax repayment claim ( Claiming a repayment ) may be necessary as 20% tax is likely to have been deducted by the bank or building society.

What should happen?

For situations such as Mrs B, this problem will resolve itself from April 6th 2008 due to the abolition of the 10% tax band on earnings and pensions income. 

Planned changes to the PAYE system in 2008, as mentioned in a previous case study, gives HMRC the ability to more readily review the tax paid by PAYE customers on an annual basis. 

We are pressing HMRC to look carefully at the reasons for overpayments in 2007-08 and automatically go back and adjust all previous years. Similarly we are asking for them to ensure that going forward the same error is not replicated.
 
If you are concerned that you have not received the full benefit of your allowances or lower tax bands, you could contact HMRC ( http://www.hmrc.gov.uk/pensioners/claiming.htm ) for advice on obtaining a refund.  For those meeting the criteria, TaxHelp for Older People can also assist (see the TOP website - http://www.taxvol.org.uk/ - or telephone 0845 601 3321).

 Extracts from articles by John Andrews and Robin Williamson, both of the Low Incomes Tax Reforms Group and reproduced with their kind permission.