No time like the present to sort out pensioners’ tax

THE PRESENT TAX SYSTEM has a structure that is overly complex – there are seven rates of income tax, without taking into account the consequences for tax credits and social security benefits. It will be a real challenge to introduce systems that can allow taxpayer access and tax return form filling based on the current rules.

The complexity is particularly a problem for some types of taxpayer, such as pensioners. There are age-related allowances that are both reduced on higher levels of income and applied at a 10 percent rate of tax rather than as a complete tax exemption in certain circumstances. Furthermore, pensioners tend to have a higher proportion of investment income than earned income (pensions) when compared with other taxpayers and investment income carries different rates of income tax depending on the source.

Higher-rate taxpayers tend to accept that they need to pay an accountant to manage their tax affairs, but our system forces many taxpayers with simpler affairs to seek professional advice.

In some respects, the UK tax system is prejudiced against pensioners, especially those only liable at the basic rate of income tax. The tax simplification lobby has not been able to make much headway in this part of our tax system. Just to rub salt into the wound, many pensioners now have drastically reduced income because the interest rates have been so low for more than two years.

I have acted for many pensioners who can no longer afford to pay an accountant, yet it is the very service they need to make sure their tax affairs are correct and that they are repaid any overpaid tax due to them.

Even HM Revenue & Customs cannot say that it has a good grip on the system. The news of repeated PAYE errors in 2010/11 is very disappointing. HMRC has not made it clear what has caused these errors, but many unresolved tax arrears go back eight years. Whatever the reasons for the errors, the mere thought of HMRC writing to millions of taxpayers to correct the position is mind-boggling.

There has been much work done in re-writing the tax legislation and there are grand plans to reform the PAYE system with Real Time Information. I like the idea of taxpayers being able to access their records and having their tax return completion partly automated. However, the underlying attempts at ‘fairness’ bring with them many complications and I am not optimistic that HMRC will be able to cope with such a change in the short term. HMRC will need to accept some cultural changes, along with the challenges of new rules and introducing new technology.

It is time politicians revisited the tax system as it applies to pensioners, introducing real simplification and cutting red tape. The jury is definitely out as to whether they will be successful in bringing in any real clarity or simplification.

Alan Boby is the tax partner at Ellacotts LLP

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