Recommendations on how to make tax simpler for Britain’s pensioners have been announced today by the Office of Tax Simplification (OTS).
The independent body has looked at the elements of tax that cause the most complications for pensioners, including tax on savings, the Married Couple’s Allowance and administrative aspects.
The OTS’s recommendations stem from extensive discussions with pensioners, representative groups, charities, tax agents and the tax authorities, and answer calls for a simpler, fairer tax system. Building on the work already in hand following last year’s report, the key recommendations are a mix of technical and administrative points:
Simplify the Married Couple’s Allowance (MCA) - the OTS recommends simplifying the MCA to remove the current income abatement system and streamlining administrative aspects, replacing it with a flat-rate payment for those still eligible.
Refocus savings incentives - the OTS found the current 10% savings rate to be a great source of complexity and ineffective, with both low awareness and low take up levels. The OTS believes it would be much simpler and more effective to abolish the 10% savings rate and use the money saved to increase Individual Savings Accounts (ISA) limits.
Revise the Blind Person’s Allowance (BPA) - this is currently poorly targeted, as those with no income tax liability do not benefit. Ideally, the OTS thinks that the BPA should be revised to provide direct grants and support for all those registered blind. In any event, it needs to be simpler to claim.
Better tax information for pensioners - the OTS recommends that the Department for Work and Pensions (DWP) issues an annual statement setting out the amount of taxable income received from the state pension and social security benefits in the tax year. This form - a ‘DWP60’ - would parallel the P60 that employers and other pension providers have to give recipients and would ensure pensioners know what taxable income they are receiving.
Simplify tax coding notice process - to address the confusion faced by many when they receive multiple PAYE coding notices from HM Revenue and Customs (HMRC), the OTS recommends HMRC issues consolidated coding notices (‘form P2C’) setting out all of a pensioner’s tax codes and showing how the personal allowance is used.
Administrative improvements - amongst several admin improvements, OTS recommends banks and building societies ask annually if the tax status of a savings account is correct, ensure account holders have correct guidance on tax on interest, and that HMRC create an online portal to submit form R40 which allows pensioners to claim back the tax they may have paid incorrectly on their savings.
John Whiting, Tax Director of the Office of Tax Simplification, said:
Pensioners have told us many times how the tax system gets more complex as they get older. We have to work within our brief to be revenue-neutral, but we think our recommendations could make a real difference in stripping away complexities and giving pensioners information that will help understanding and make it easier for them to deal with their obligations.
One great source of complexity is the way the state pension is taxed. Bringing this into the PAYE system would cause lots of problems and exempting it from tax, whilst attractive to recipients, would be unfair on other taxpayers and costly for the government. So we’ve focused on coming up with sensible solutions that could provide real help in making it easier for millions of pensioners to deal with their tax responsibilities.
Today’s report builds on last year’s interim report, which is already leading to improvements in HMRC service to pensioners.
Throughout the review the OTS gathered evidence from meetings, surveys and road shows throughout the UK, giving pensioners, professional advisers and representative bodies a chance to contribute to the review. A research project was also undertaken by an independent organisation on behalf of the OTS and HMRC.
This final report with recommendations has been published on the OTS homepage and has been put to the Chancellor of the Exchequer for consideration.
Notes to Editors
The OTS’s work on pensioners’ tax has been undertaken over the last 15 months. The initial report on the problems pensioners encounter with the tax system was published in March 2012 and is available on the taxation of pensioners page. HMRC and DWP have already started work on many of the issues raised by the OTS and a progress report on items being pursued is included in the current report at Annex A.
The OTS also published a final report on its separate review of unapproved share schemes in January 2013. The report can be found on the employee share schemes page.
The independent Office of Tax Simplification was established on 20 July 2010 to carry out reviews in order to provide expert advice to the Chancellor on options to improve and simplify the UK’s tax system.
The OTS started its work in September 2010 and initially took forward two reviews: tax reliefs and the first stage of small business taxation. Since then, the OTS has issued a further report on the review of small business, which made recommendations for a simpler tax system for the very smallest businesses, a disincorporation relief and many administrative improvements. The OTS’s next project concerns employee’s expenses and benefits. More on the OTS reviews can be on the OTS homepage.
The OTS team is led by Chairman Rt Hon Michael Jack, and Tax Director John Whiting, and has a staff drawn from HM Treasury, HM Revenue & Customs and secondees from the private sector. Details and biographies are available on the OTS website.
Issued by Office of Tax Simplification Press Office
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