Small Pensions

It seems that pensioners are having a few tax worries at the moment.

Last week I noted how a failure of communications between the DWP and HMRC led to a large number of pensioners underpaying their tax on their state pension, as a result of erroneous tax codes being applied.

On top of this, around 420,000 pensioners on low incomes were also under threat of having backdated tax demands for up to £300 being issued relating to underpayments of tax on "small pensions".

The issue arose as a result of a concession granted by the then Inland Revenue, over twenty years ago.

The Revenue told pension providers not to bother collecting any tax on "small" pensions, those of around £1,000 a year or less.

Strictly speaking the income was taxable, but the Revenue took the view that the administration costs involved outweighed the revenue benefits; ie commonsense was applied.

However, that was then and this is now.

As I have noted many times before, the government is broke and desperately needs to increase its tax take. As such HMRC, as it is now called, decided to end the concession and collect the unpaid tax.

Until this week HMRC was planning to backdate the tax to 2007/08.

However, this would have entailed up to 420,000 people being on the receiving end of a tax bill of up to £300 on income they have been up until now been receiving tax-free.

Last Friday 30 May, Treasury Secretary, Jane Kennedy, wrote to Age Concern to say she had "asked HMRC to carefully consider again their proposal."

The Revenue has now decided to "draw a line under 2007/08."

This concession is interesting, as HMRC have over the last year or so held the "upper hand" over the Treasury wrt "power play" in this government. Maybe the pendulum is swinging the other way?

However, tax will be applied on income arising from small pensions from 2008 onwards.

An HMRC spokesman said:

"In practice pensioners will pay tax on such pensions from the 2009/2010 tax year. Any underpayment of tax for 2008/09 will normally be collected in 2010/11.

This extended timetable takes into account the modernisation of our Pay as You Earn IT systems which are a key priority for HMRC in 2008."

The BBC have done a calculation that shows a pension of £1,000 would be paid in full this year, would have £200 tax deducted in 2009/10, and in 2010/11, would be paid after deducting £400 in tax.

John Whiting, an accountant and member of the Low Incomes Tax reform group, told the BBC:

"The Revenue has decided to turn on the taxing tap this year.

But they are not going to tell people because they don't know exactly who they are and won't know until later in the tax year.

It would have been much fairer if they'd written off this year's liability as well."

Maybe so, but the government is broke and "fairness" no longer comes into the equation.

A Revenue was quoted by the BBC:

"We are looking at how we are going to tell people.

We'll get the information in the middle of 2008/09.

So they will be told about it towards the end of the tax year."

Ugh, our tax system is a real mess.

For fark's sake let's simplify it for the good of the taxpayers who have to pay tax, and HMRC who have to try to administer it!

Tax does have to be taxing.

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