Thanks to complicated and confusing systems, pensioners are getting ripped off by the Government, writes Malcolm Wheatley. Here’s how to fight back.
Last month, Parliament’s Public Accounts Committee published a damning report into the way that HM Revenue & Customs taxed older people -- especially pensioners.
Older people make up 18% of taxpayers. And in 2007, the number of people over the state pension age was, for the first time, greater than the number of children. So they’re hardly a minority group.
But despite this, the report concluded that older taxpayers were getting a ‘raw deal’ in their dealings with HMRC. They are more likely to comply with their tax obligations than other taxpayers, but are less likely to understand them -- and many pay more tax than they need to.
Pensioners pay too much tax
In several ways, older people are poorly served by HMRC, said the committee.
For a start, because HMRC’s systems don’t cope well with older people’s multiple sources of income, an estimated 1.5 million older people have overpaid tax by around £250 million, because of discrepancies between HMRC’s records and the records of employers and pension providers.
In addition, some 2.4 million older people have also overpaid around £200 million in tax, because they did not have their savings income paid gross of tax, and haven’t claimed back the tax deducted at source.
And despite the fact that older people generally have more complicated tax affairs, older people were however less likely to contact HMRC for help -- even though 36% did not understand their obligations, compared to 26% of all taxpayers.
Finally, it appeared that too few older people were claiming the age‑related tax allowances that they were eligible for. This wasn’t too surprising, said the committee, because the rules on eligibility are difficult to understand, and older people do not find the claim form easy to complete.
No change soon
The committee made eight recommendations, ranging from the introduction of simpler system for older people, the provision of more help for older people in terms of tax advice, and a drastic simplification of the age-related allowance system.
All good sensible stuff, especially the simplification of the age-related allowance system. Heck, I’ve got a Ph.D and even I don’t fully understand it.
But don’t hold your breath. Although HMRC is introducing new systems, experts aren’t confident. And even when those new systems are fully functioning, the National Audit Office is predicting that there will still be 20 million unmatched tax codes that it could take years to resolve.
So what can I do?
Despite that, help is at hand. Although the rules are complex and confusing, it’s not too difficult to get the basics right.
Here, for example, is the part of the HMRC website dealing with pensioners. And there are handy links to three highly relevant pages: the low-down on how pension income is taxed, what to do if you think there’s been a mistake in your tax code, and how to claim back tax.
There’s also a link to a useful page produced by the Low Incomes Tax Reform Group, dealing with the time limits and documentation required for claiming back over-paid tax.
Don’t forget, too, that £200 million in over-paid tax on savings interest. Here’s a handy overview on how savings interest is taxed. Here’s how to register to get your savings interest paid gross, rather than with tax deducted. Here’s a handy online tool to see if you’re eligible for this. And here’s how to claim back tax paid on savings interest.
Find out the easy way to invest your ISA and beat the returns on cash
Finally, don’t forget the virtues of simplification. Earnings from an ISA -- whether dividends or interest -- attract no further tax, and don’t even have to be reported on your tax return. So make sure you squirrel away as much as possible in ISA tax shelters.
You may also want to consolidate investments -- including cash ISAs -- into a single holding at a fund supermarket such as Hargreaves Lansdown or Alliance Trust. That way, you’ll get one statement, and single consolidated payments -- which should make things easier to track.
Compare cash ISAs at lovemoney.com
Full disclosure: Malcolm has SIPP and ISA investments with both Alliance Trust and Hargreaves Lansdown.