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John Andrews of the Low Incomes Tax Reform Group highlights potential good and bad news for pensioners.

Introduction

Some pensioners are to receive letters any day now telling them that small pensions which they have received for a number of years have not been taxed properly and that this will be corrected from this April.

Although this will be unwelcome news for those who receive such a letter, it is actually very good news that there will be no attempt to tax the past.

Background

At last the long-running saga of small untaxed pensions ( see pensions not taxed in the past (continued) ) is coming to an end. Just under 100,000 pensioners will be receiving letters in the next few days advising them that from 6 April 2009 their tax position will be regularised. This could mean that they from 6 April they will be paying tax on small pensions that have not previously been taxed.

Although this will be unwelcome news for many pensioners, we would encourage them to look on the bright side. HMRC confirm that they will not collect any tax for years prior to 2009/10, unless there are exceptional circumstances.

The debate with HMRC

This was not the position when we took up the cudgel well over a year ago.

At that time, HMRC were intending to collect the arrears of tax that had accumulated on the small pensions since April 2007. But we have worked closely and co-operatively with HMRC and, with the much greater detail available over time, it has been possible to agree that tax should be applied only from April 2009.

Meanwhile a debate has ensued about why the pension payers did not operate the correct tax procedures on those small pensions – resulting in many pensioners unwittingly underpaying tax – and what powers HMRC have to forgo tax in such circumstances.

We are grateful for the support we received from a consortium of Age Concern, Citizens Advice, Help the Aged and Tax Help for Older People. We are also grateful to Philip Baker QC for his pro bono help in analysing some of the trickier parts of the legal situation.

What should pensioners do now?

If you are a pensioner receiving one of these letters there is nothing that you need to do immediately. HMRC will warn you that they have told the payer of your pension to deduct the appropriate amount of tax from April 2009.

This will happen where they think they know enough about you to get the tax deduction right. Shortly after you have received the letter, HMRC will send you a coding notice showing how they have arrived at the amount to be deducted in tax.

If they do not hold enough information about you to issue a coding notice they will probably send you a longer form for you to complete.

If at the time you receive the letter, or subsequently, you are in doubt as to whether everything is in order then we suggest that you telephone the tax charity Tax Help for Older People on 0845 601 3321. They will be happy to give you free and independent advice.

State benefits

If you receive State benefits, such as pension credit, housing benefit or council tax benefit, you may be entitled to extra help if you have to pay more tax. This is because benefits are calculated on your income after tax is paid. Contact The Pension Service (for pension credit) or your Local Authority (for housing or council tax benefit) if you are already receiving these benefits.    

If you are not currently receiving any such benefits you may want to enquire about your eligibility to receive them. You can do this for pension credit by ringing 0800 99 1234. They can also help you to claim housing benefit or council tax benefit. Have your national insurance number ready when you ring.

Many pensioners do not claim benefits to which they are entitled and the claims process is now so much easier than it used to be that we would encourage everyone to ring to check whether they might be entitled.