Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

Big tax errors spell misery for lower income pensioners

by
20th Jul 2007
Save content
Have you found this content useful? Use the button above to save it to your profile.

It has just been made public that HMRC has not been taxing many small pensions properly - for years. The good news for pensioners is that HMRC have listened to the appeals of the Low Income Reform Group, amongst others, and announced that whilst it will be adjusting 2007/08 coding notices, it will not try and collect underpayments for earlier years.

HMRC estimates, on the basis of sampling, that it has not collected income tax from about 420,000 pensioners (5%) of cases, with a potential tax loss of some £135 million per annum. The problem dates back to 1983 when its PAYE computer system was introduced, and so could have resulted in a loss of tax of some £3 billion to-date.

According to the recent NAO audit report on HMRC’s departmental accounts: the problem started when HMRC published guidance to pension providers which was not strictly in line with the PAYE regulations and processes. This guidance advised pension providers not to operate PAYE for new pensions when no form P45 was produced by the pensioner and the pension payment was below the basic personal tax allowance. The precise rationale for these instructions are now unclear but HMRC believes they were introduced as a short term measure to reduce the volume of data needing to be processed at the time PAYE was computerised; but the practice has only recently been withdrawn.

In addition to this incorrect guidance a number of inappropriate local agreements were made between local tax offices and pension providers to exclude some pensions from tax on a ‘de minimis’ basis. These agreements varied but, typically were for tax not to be deducted from pensions of £500 or less. In some cases it now appears that the ‘de minimis’ amounts have been increased over the years, in some cases with the authority of the local tax office and in some cases without. This means that some larger pensions might now be going untaxed.

A further problem is the old PAYE computer system worked by jobs and not individual and so pensioners with more than one source of income under PAYE had separate records, and many of these will have also had incorrect codings.

HMRC first became aware of this issue in April 2005 and changed its incorrect guidance, but it has to still unwind many of the local agreements which have erroneously still remained in force. It issued guidance this week for pensioners to say that it is contacting pension scheme providers, and that tax for 2007/08 will be adjusted if necessary in the 2009/10 tax coding.

Comment
This problem does not apply pensioners who already file tax returns, and HMRC may have extreme difficulties publicising it, as those affected will be tend to be in the lower income bracket, and may consider themselves non-taxpayers. As such they will be highly unlikely to visit www.hmrc.cov.uk, until, of course they discover there is a problem and this will not be until July 2008 at the very earliest, when pension schemes file details as requested by HMRC.

Tags:

Replies (5)

Please login or register to join the discussion.

avatar
By egbell
24th Jul 2007 09:54

HMRC won't agree!!!
Mark quite rightly surmises that there will be many who have over[paid & are unaware.However,a Revenue inspector who lived in my village some years ago stated that it was "generally known"that more tax was underpaid than overpaid!He could not prove this to me of course & I told him politely that I did not share his opinion!!!

Thanks (0)
avatar
By paddymillard
25th Jul 2007 08:05

Oppression of the poor
I can only depress Mark further by telling him that his story and countless similar are everyday work for TaxHelp for Older People and we are aware that we are only tackling the tip of the iceberg. Also as Edward observes, the errors that we see are 90% in favour of the Treasury - and we back that assertion up by opening our records to HMRC.

Thanks (0)
avatar
By AnonymousUser
24th Jul 2007 13:13

Pension tax issues
I was aware that those of us with military pensions had a differing background to that explained in either your article or that at the HMRC website. My recollection is that there was some lobbying and as a result 'military' pensions were paid 'free of tax' and then all tax affairs were rolled up later in the year when the full tax implications were understood.

Trouble is, there are so many changes or other interpretations that things get muddled or changed regardless. Then everyone is in a mess! Mind, those who lose out most are seemingly always the lower end earners. Why ever should that be - bullying or something similar maybe?

Also it is always helpful if you can afford an expensive Accountant or Tax advisor to find their way through the muddle for you! Making jobs for whom maybe a good question too.

Then God forfend - we are further discriminated against by Mr Brown and his recent budget 'spun' - making the tax bill lower and simpler - how can these people be so dishonest. For sure that is what it is! Trust - why should anyone trust them? Don't 5 million plus people matter - one might also ask or did someone just 'save his job' by making his/her targets somehow?
CAV

Thanks (0)
avatar
By pilkers
23rd Jul 2007 18:11

What about overpayments?
I am a part time self employed bookeeper, who was horrified to discover that my 83 year old mother in law who has an occupational widows pension of some £1500 per year to add to her state pension was being taxed on a BR tax code, and has been for the past 5 years (since she was widowed). Her initial reaction was "it must be right" followed by "dont make a fuss". I wrote on her behalf to HMRC to be greeted with a heap of forms. Again I had to overcome her reluctance to continue with the cause. I perservered and have won her a refund of over £1300.

I am concerned that she is not alone. How many other OAPs are there out there, who dont have someone who has the knowledge to challenge such mistakes? I am afraid that senior citizens when confronted with a barrage of forms or letters from HMRC written in official language either panic or just ignore them. For every one who underpays tax, I am sure there are many others who overpay, and they are probably those who can least afford to make large gifts to HMRC.

Mark

Thanks (0)
avatar
By Pension bod
30th Jul 2007 12:26

Pensioners
I have been in pensions for many years- mainly on the occupational side of things.

Its good to see that HMRC are taking a balanced view on this- as most pensioners seem to really stuggle.

However, one large oil company that I worked for - had an agreement with HMRC that the first month's pension payment for all new pensioners - would not be subject to tax.-

Another company did not pay the widowers Post 88 GMP.- everyone else does - but for some reason "they didn't have to".

Thanks (0)