Background

Mrs D, aged 66, asked TaxHelp for Older People (TOP) to check that she was paying the correct amount of tax on her income.  She had recently retired and her income for 2006/07 consisted of her state pension, a small retirement annuity and some interest on her bank account. Her income including tax taken off came to around £7,600 - lower than the previous year (2005/06) as that had included her earnings up to the date of her retirement. 

What happened?

Mrs D was entitled to an age-related personal allowance from the year in which she reached age 65 – 2005/06.  When she received a tax calculation for 2005/06 it informed her that she had not paid enough tax and asked her to pay £251. 

The TOP volunteer advised Mrs D that HMRC had failed to allocate the increased age-related personal allowance to her.  The tax calculation for 2005/06 was incorrect and in fact Mrs D should have been due a refund of £232.  Mrs D was also due a tax repayment for 2006/07 and the total tax reclaimed was £709. 

Why did this happen?

If HMRC has your date of birth on record, they should know when you reach age 65.  You would therefore assume they know you are entitled to the age-related personal allowance, but you would be wrong!

HMRC do not automatically allocate you the age-related personal allowance.  They argue that  they have to be claimed and whilst this is technically a correct interpretation of the law many new pensioners will not be aware that they need to do anything at all.

Before you reach age 65, HMRC should issue you with form P161. This Pension Enquiry form should be completed and returned to HMRC to tell them what your income will be in retirement.  From this, HMRC should allocate you the correct personal allowance based upon your age and income level.

However you should be aware that the form will not be automatically issued to you if you are self-employed. In that case you will need to write to HMRC to get a P161 to complete or you can download one using the link above.

This is a manual system and there is plenty of evidence that it does not work well as a number of pensioners will not receive the form and will therefore do nothing. If you do not receive a P161 this does not mean you need not complete the form. To make sure HMRC have the correct information it is worth sending in a P161 and tell them in an accompanying letter that you want your full age-related allowances from the start of the tax year when you will be 65.

Mrs D was lucky in that she was referred to TOP and the problem was spotted early on.  Some pensioners have not been allocated their full allowances for many years – the oldest taxpayer we have seen in this situation was aged 91.  In such cases, it is extremely unlikely that HMRC will agree to review your case going back more than six years. 

What should happen?

HMRC knows when someone is about to become entitled to a state pension as the  Pension Service tells them. HMRC also has information about the various occupational pensions and earnings received by that person. As we noted in our first case study, there is hope in 2008 that this range of taxpayer information will be automatically brought together by new HMRC systems.

As the vast majority of pensioners are entitled to the age-related personal allowance  from the year they reach age 65, LITRG has long argued that HMRC should allocate this allowance automatically, unless they have information to indicate that it will not be due because your income is too high .

But at present, the system remains that the age-related personal allowance has to be claimed. With their new capability to  collect and match data more efficiently it is imperative that HMRC take on the responsibility to advise the taxpayer of their entitlement to their allowances. LITRG will continue to press for this to happen.

You should therefore make sure that for the year in which you will be 65 and for later years you check you are being allocated the correct personal allowances.  If you pay tax under PAYE on your wages or pension, you should check your coding notice. 

Existing pensioners should also check they are being given their full personal allowances; as you may be able to claim tax back for up to six years  if you have not received your full entitlement.

A further allowance may also be  due for people who are registered blind or the equivalent in Scotland. This is called the Blind Person’s Allowance. An additional allowance – the Married Couple’s Allowance may also be available to  married couples or civil partners where at least one of the couple was born before 6 April 1935. 

Help may be available from TaxHelp for Older People  (see the TOP website use their Helpline number 0845 601 3321).