Recommendations to make the system easier to cope with
On 23 January 2013 the Office of Tax Simplification (OTS) published its final report on pensioner taxation: Review of pensioner taxation final report. This provides a comprehensive review of the problems that those of pension age encounter in dealing with their tax, and sets out a package of recommendations for simplifying this area of the tax system.
Recommendations cover both administrative and tax policy changes, including the introduction of a state pension/benefits P60 for pensioners and a single composite P2 coding notice, and ways to simplify the 10% savings rate, married couple’s and blind person’s allowances.
John Whiting, Tax Director of the Office of Tax Simplification, said:
“Pensioners have told us many times how the tax system gets more complex as they get older. We have to work within our brief to be revenue-neutral, but we think our recommendations could make a real difference in stripping away complexities and giving pensioners information that will help understanding and make it easier for them to deal with their obligations.”
The next step is for the Chancellor to consider the recommendations – which of them to take forward, and how – and we are likely to hear more in the March 2013 Budget.
The OTS’s recommendations stem from discussions with pensioners, representative groups, charities, tax agents and the tax authorities. The OTS consultative committee on this project includes experts from a variety of backgrounds with a lot of practical experience in this area, including Jane Moore from the Tax Faculty.
The key recommendations on technical points are:
- Simplify the married couple’s allowance (MCA) – remove the current income abatement system and replace it with a flat-rate payment for those still eligible.
- Refocus savings incentives – the OTS found the current 10% savings rate to be a great source of complexity and also ineffective, with both low awareness of it and low take-up levels. It would be much simpler and more effective to abolish the 10% savings rate and use the money saved to increase ISA limits.
- Revise the blind person’s allowance (BPA) – this is currently poorly targeted, as those with no income tax liability do not benefit. The OTS thinks the BPA should be revised to provide direct grants and support for all those registered blind. In any event, it needs to be simpler to claim.
And the key recommendations on administrative points are:
- Better tax information for pensioners – the OTS recommends that the Department for Work and Pensions (DWP) issues an annual statement setting out the amount of taxable income received from the state pension and social security benefits in the tax year. This form – a ‘DWP60’ – would parallel the P60 that employers and other pension providers have to give recipients and would ensure pensioners know what taxable income they are receiving.
On this area, John Whiting said:
“One great source of complexity is the way the state pension is taxed. Bringing this into the PAYE system would cause lots of problems, and exempting it from tax, whilst attractive to recipients, would be unfair on other taxpayers and costly for the government. So we’ve focused on coming up with sensible solutions that could provide real help in making it easier for millions of pensioners to deal with their tax responsibilities.”
- Simplify the tax coding notice process – to address the confusion faced by many when they receive multiple PAYE coding notices from HMRC, the OTS recommends es consolidated coding notices setting out all of a pensioner’s tax codes and showing how the personal allowance is used.
- Administrative improvements – the OTS recommends banks and building societies ask annually if the tax status of a savings account is correct and ensure account holders have correct guidance on tax on interest, and that HMRC creates an online portal to submit form R40 which allows pensioners to claim back the tax they may have paid incorrectly on their savings.