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Pensioner poverty and the tax system

Published on 11 January 2004

Response to the Social Security Committee by the Low Incomes Tax Reform Group of the Chartered Institute of Taxation regarding Pensioner Poverty - 2 June 2000


We are pleased to have this opportunity of contributing to the Committee's inquiry on pensioner poverty. In the two years of its existence, the Low Incomes Tax Reform Group has researched how tax law, policy and administration affects older people on low incomes, and has corresponded with hundreds of pensioners. Its findings are set out in two reports, and in many articles in both the national and professional press.

In this Paper, we concentrate on how the tax system in its present form can make poorer pensioners yet poorer (section 3), and how disproportionate compliance burdens on older people can add to the existing anxieties of being poor (section 4). We look at just two of many small, unnecessary burdens which affect older, poorer taxpayers more than others (3.5). We consider possible solutions to the problems we raise (section 5), and conclude with a note about the pensioners' tax credit (section 6).

We examine the effects on poorer, older people of the withdrawal of payable tax credits on dividends in April 1999. While countervailing measures were introduced to ensure that higher rate taxpayers did not lose out, no steps were taken to protect the poorest.

While tax deducted at source on building society and bank interest remains repayable, older people are often unaware of their rights. We hope that the coming Taxback campaign by the Inland Revenue will go some way to addressing this issue, and we call for particular help for those who now benefit from the 10 per cent starting rate, but have to claim back the excess tax deducted at 20 per cent from their savings. Similar problems arise with other types of investment typically held by older people, such as retirement annuities, where tax is deducted at a flat rate and has to be claimed back. Ideally, life companies would be required to operate PAYE on such payments.

We highlight widespread ignorance - on the part of Inland Revenue staff as well as pensioners - of the correct tax treatment of benefits, sometimes resulting in overpayment of tax. We suggest a few possible joined-up initiatives by the Inland Revenue and the DSS which might help tackle this problem.

We then look at areas where the complexity of tax administration causes poorer pensioners avoidable distress, notably the practice of issuing Self Assessment forms where untaxed income exceeds a certain threshold, and call for the problem to be addressed more radically than hitherto, for example by some form of simplified reporting.

We discuss broad solutions which we have researched, some borrowed from overseas jurisdictions where they have worked well. These include the idea of a tax exemption certificate for older people, and a tax volunteering scheme.

Finally, we look at the proposed pensioners' tax credit in the context of poorer pensioners' particular need for administrative simplicity, and call for properly thought-out delivery supported by simple forms and decent levels of customer support.


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