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John Andrews of the Low Incomes Tax Reform Group ( http://www.litrg.org.uk/ ) highlights more tax issues potentially affecting the elderly.

Self Assessment Returns sent 'out of the blue'

The majority of people do not have to complete a self assessment tax return.  This is because employed earnings and pensions are generally taxed under Pay As You Earn (PAYE).    

Let us consider why it is that some receive a full self assessment tax return after many years of no contact with HMRC and without an explanation. This can be a very worrying experience for a pensioner.

Background

Mr H is 77.  He retired early in 1991 due to ill health and cannot travel far for this same reason.  Given that his company pension fund collapsed about a month before he was due to take his pension at age 65, his income is not sufficient for him to pay tax after claiming the allowances due to him. 

What happened?

Mr H was distressed when – ‘out of the blue’ – he received a 2006/07 tax return for completion.  He was put in touch with TaxHelp for Older People (TOP) for help.  He did not contact HMRC for help, as he wanted to discuss the matter with someone personally. 

The only explanation with the tax return was a standard letter from HMRC which gave Mr H a long list of possible reasons for the return being sent but no clear indication of which one applied to him. 

Mr H’s income amounted to just over £9,100 in total (approx £8,500 state pension and £600 of bank interest).  When taking into account all his allowances Mr H had no tax to pay. 

Why did this happen?

We do not know what exactly triggered the issue of a tax return to Mr H.  It is probable that HMRC reviewed their records of state pension and saw that the amount he receives is more than his personal allowance.  As he has no other pensions, issuing a tax return is the easiest, but not most helpful, course of action HMRC can currently take to check his tax liability. 

In this case, they might have been able to ease the burden on Mr H by issuing him with a short-version tax return based upon the information they held about him. 

What should happen?

This is another illustration of the problems caused through the Department for Work and Pensions (DWP) not taxing the state pension. If the state pension was in the PAYE system HMRC would have an alternative, automated, mechanism for reviewing the tax position of the pensioner. 

Sometimes, as we saw with Mr H, there is no liability and on other occasions the issue of a return is an HMRC error. Exceptionally, HMRC will allow the return to be sent back to them without completion.

We would like to see HMRC adopt a customer-friendly approach if they want to check the tax position of a pensioner. This can be done in most cases with a short questionnaire or letter. This level of help is not achieved by the standard letter. 

For help with tax returns, you can call the HMRC self-assessment Helpline . 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).