Mrs W, aged 67, went to TaxHelp for Older People (TOP) to check she was paying the correct amount of tax on her income which included two part-time jobs, her state pension and two other small occupational pensions. Her total income for 2006/07 was approximately £9,200.
As Mrs W is over 65, she is entitled to the increased ’age related’ personal allowance. In the tax year in question 2006/07, this allowance was set firstly against her state pension (as this is paid with no tax taken off) and then against her occupational pensions.
By using her allowances only against her small pensions – Mrs W was unable to use up the full amount and she also lost the benefit of the10% starting rate of tax. At the same time, her part-time earnings were being taxed on a BR code so that she was paying tax at the basic rate of 22% on the full amount of her wages instead of being able to use the rest of her allowances and the entire 10% tax rate.
The unfortunate result of the above was that Mrs W overpaid tax in 2006/07 of £826. However with the help of her TOP adviser, the overpayment was refunded in full and HMRC amended her coding notices so that Mrs W should pay the right amount of tax in future.
Why did this happen?
Where a system is not totally automated so that there is a degree of manual input - invariably the potential for error or omission arises. HMRC need to be proactive in prioritising cases of multiple pensions/earnings sources to ensure that allowances and the starting rate of tax have been allocated in full - something that is just not happening at present.
It is a fact that most pensioners will not realise they need to check they have utilised their full entitlement to allowances and the starting tax rate. Obviously with no clear instructions available and without some kind of external help it is inevitable a considerable number of these pensioners may be overpaying tax every year without even realising they have done so.
What should happen?
In the past, the PAYE system has been centred on the needs of employers/pension payers, so that earnings and pension details for an individual may be held on a number of different HMRC computers. The structure of HMRC’s computer systems is currently being upgraded (one of our earliest recommendations) so that all the sources of PAYE income for an individual are ‘joined up’. It is hoped we may see the benefit of these alterations later in 2008.
If this new system is to work properly, HMRC will have to:
- devote considerable resources to improving communication with the pensioner population;
- ensure that if a review of the pensioner’s tax position produces a repayment, this is automatically repaid without the need for a claim
- where an overpayment is identified, there is an automatic review of earlier years to check if a similar situation applies
One short term downside to this newly ‘joined up’ system is that HMRC may discover previous coding errors for an individual leading to uncollected underpayments of tax for earlier years. However, where such underpayments have occurred as a result of HMRC failing to use information already in their possession, they should take a sympathetic approach. Sadly HMRC sometimes they have to be reminded that they should do so.
TOP is a charity providing free advice on tax to older people on low incomes who could not otherwise afford any professional help. If you think the above situation also applies to you or you need help with other tax problems please have a look at the TOP website or telephone their helpline on 0845 601 3321.
Contact: John Andrews (Tel: 0844 579 6700 Fax 0844 579 6701)