Cash, but not clarity, for pensioners - Elderly Client Adviser

Feature

posted 1 Mar 1999 in Volume 4 Issue 3

Cash, but not clarity, for pensioners

In a post budget summary the Low Incomes Tax Reform Group, a body dedicated to making the tax system more friendly to the needs of taxpayers on low incomes which was established by the Chartered Institute of Taxation, examines the effects of the Chancellor's measures and questions why are they still so confusing and complicated.

The Low Incomes Tax Reform Group, whilst welcoming the additional resources given to older people on low incomes by the Budget, is dismayed at the methods by which these reforms are to be delivered through the tax system.

In its report published last December the Group called for a major overhaul to the obscure and complex tax system that is imposed upon people of 65 and over who have low incomes. A great opportunity for reform has been missed in this Budget.

The regime from 6 April 1999 adds to the complexities facing the poorest pensioners and in some circumstances there has been a real reduction in their incomes:

a widow whose husband died this year would have received a tax credit worth £285, whereas next tax year this is reduced to; £197 (widow's bereavement allowance);

a pensioner in receipt of the basic retirement pension and £400 of dividend income in the current year would be able to reclaim; £100 of tax credits, but this will not be reclaimable at all next year;

a married woman pensioner may currently claim by right £142.50 of the £495.75 tax credit due through the married couple's allowance, but from next year she will only be able to receive £98.50 of the larger sum of £512.50 (for couples where one is aged 65 to 74): the balance will normally go to her husband.

Administratively pensioners will have to receive even more forms and communications from the Inland Revenue next year because:

more pensioners will be due repayments from the Inland Revenue. Many receive pensions with tax deducted at source of 20% or 23%: repayments will now have to be made to reflect the new 10% band;

many pensioners have multiple pension sources of small amounts and the reduction in the size of the first tax paying slice (£1500 @ 10%) rather than currently (£4300 @ 20%) will make the coding notices for giving relief for the married couple's allowance more difficult to operate and explain;

many will have to review whether they can now have their banks, building societies or pension companies pay their income to them without tax deduction (filling in forms R85 or R89);

pensioners entitled to the married couple's allowance may need to consider whether, in the light of the changes, they should vary, by agreement between them, the way the allowance is allocated. They need to do this by completing form 18 before 6 April next;

many pensioners have savings income with banks or building societies where tax is deducted at 20%. As savings income remains taxable at 20% and not the new reduced rate of 10%, this will be confusing to pensioners who may not get the benefit they expected. They should now be reviewing their savings strategy.

The Chancellor said that "people will see it [the benefit of the 10% low rate] in their pay packets in May". The LITRG is pleased that the Inland Revenue are able to deliver the necessary adjustments to coding notices in that timescale.

The LITRG report identified in December a number of things that the Inland Revenue needed to do better, and some of those (set out below) will be essential if older people on low incomes are to receive the benefits to which they have become entitled and understand what is happening to them:

an updated booklet for pensioners (IR121) covering the new regime for the married couple's allowance, blind person's allowance, widow's bereavement allowance, savings income and the lower rate of 10% should be issued in April to all pensioners;

the revised coding notices to be issued to pensioners in April should be accompanied by an explanation of how this ties in with the coding notice issued in January/February, otherwise pensioners will have no hope of checking them as required by the Inland Revenue;

new forms R85 and R89 on which non-taxpaying pensioners may claim to receive income without tax deducted should be issued by the Inland Revenue to banks, building societies and pension companies in April so that they, in turn, may help their customers to ensure they do not have excessive tax withheld;

every tax office should have an individual "badged" as a customer service representative for older taxpayers, so as to be able to explain clearly these changes to callers;

reply paid envelopes and local rate calls should be introduced for older taxpayers;

older taxpayers with multiple sources of income should have their coding adjusted for next year in a manner that produces the simplest and dearest tax position appropriate to their circumstances;

the Inland Revenue should not send self assessment returns in April to these older taxpayers on low incomes; they will have enough to cope with given these changes.

To illustrate the complexity of the new system as from April we might contrast the cases of three single pensioners, under the age of 75, with a state pension of £4000. They all have additional gross taxable income of £2000. Pensioner A's additional income is dividend income, Pensioner B's is bank interest and Pensioner C's is a retirement annuity. Although they all have the same gross taxable income, they will have net disposable income after tax of:

Pensioner A £5800

Pensioner B £5944

Pensioner C £5972

This is utterly confusing for the pensioners and they will look to the Inland Revenue to explain the differences. We hope that the Inland Revenue will be able to do so.

Finally, the proposals for the phasing out of the married couple's allowance as from April 2000 seem to create a new unfairness as between pensioners. It is also not clear precisely how older taxpayers are to be compensated for the withdrawal of the widow's bereavement allowance.

The Low Incomes Tax Reform Group is glad pensioners are generally going to have more to spend following the Budget changes. However John Andrews, Chairman of the Group, commented:

"It may be that older people on low incomes will have to spend some of their Budget savings to check whether their now ever more complex tax position is correct. I can guarantee that many pensioners will find dealing with the consequences of these changes a very worrying and stressful experience I hope that the Inland Revenue will pull out all the stops to prevent this happening."