Pensioners face paying extra tax on savings

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More than half a million savers, most of them pensioners, should be forced to pay more tax, say Treasury advisers.

The Office of Tax Simplification (OTS) said the 10 per cent tax rate paid on some savings income should be scrapped so that all such income is taxed at 20 per cent.

The OTS is an independent group of advisers set up by the Coalition to propose ways of making the notoriously complex tax rules easier to understand.

The 10p rate applies to the first £2,710 of income from savings of low earners and was left in place in 2008 “to encourage savers” when Gordon Brown controversially scrapped the 10p rate of income tax.

The OTS found that the 10p rate was little understood and added unnecessary complexity to the tax rules. As a result, it should be abolished, the panel said.

The change would cost 525,000 savers, most of them pensioners, an average of £90 a year, or £5 million in total. In exchange, the advisers said, annual limits in tax-free Individual Savings Accounts (Isas) should be increased for all savers. That would mean pensioners had to move savings into Isas to avoid a tax rise.

The OTS also said pensioners should receive a P60-style form detailing their income over the previous year to make it easier for them to file a tax return and pay the correct amount of tax.

The form would give pensioners an accurate figure for their taxable income from the state.

Pensioners currently receive an annual letter from the Department for Work & Pensions setting out their entitlement for the forthcoming tax year, but they do not receive a statement of their entitlement for the previous year.

“We recommend that every April (Paris: FR0004037125 - news) the DWP issues a P60-type form stating the amount of taxable income, from the state pension and other taxable state benefits, which a pensioner was entitled to in the previous tax year,” said the OTS.

“This would give pensioners an accurate figure for their taxable state income and enable them to check they are paying the right amount of tax.”

A “pensioners’ P60” would also reduce the complexity that arises from payment of the state pension on a weekly rather than monthly basis, the tax simplification office said. It said this made it difficult for many pensioners to calculate their annual income for a particular tax year.

It also recommended that HM Revenue & Customs introduce a single composite PAYE coding notice, which would bring together the various individual codes for each source of income in PAYE.

The OTS also recommended changes to tax allowances for older married couples and blind people.

And banks and building societies should be told to do more to check the tax status of pensioners’ savings accounts, since too many are still paying the wrong amount of tax

The Low Incomes Tax Reform Group, a campaigning body said the proposals were sensible. “This should greatly improve people’s understanding of how their pensions are taxed — something which has bewildered many for years,” it said.

The Treasury said ministers would respond to the OTS recommendation later this year, with announcements possible in the Budget in March.