HM Revenue and Customs: Dealing with the tax obligations of older people - Public Accounts Committee Contents

1 Claiming additional tax allowances available to older people

1.  Older people are a significant and growing group for the Department, representing 18% of taxpayers. Around 5.6 million older people were liable for Income Tax of around £14.2 billion for 2006-07, the latest data available. They are a more compliant group than other taxpayers. But their tax affairs can become more complicated on reaching pension age, mainly because they often have multiple sources of income. The Department's systems do not cope well with these circumstances. For many older people, errors which lead to even small overpayments or underpayments of tax can have a significant impact on their income.[2]

2.  One reason why older people may pay more tax than required is because they do not claim additional tax allowances. At 65, people can claim an age-related tax free allowance which is higher than the basic personal allowance and which increases once they reach 75. These allowances are one of several Government measures, including Pension Credit, to help people financially in later life. The allowances are means-tested and rules on eligibility are difficult to understand because entitlement reduces as income rises above certain thresholds. An estimated 3.2 million older people do not claim the age-related allowances.[3] Following the Comptroller and Auditor General's report, the Department had begun work to identify how many of this group might actually be entitled to the allowances and had arrived at a working estimate of 500,000. The Department, however, did not yet have an accurate picture of the number of older people who were paying too much tax as a result. There were similar gaps in the Department's knowledge about how many people were eligible for the Blind Person's Allowance or the Married Couple's Allowance but were not claiming them.[4]

3.  The onus is currently put on older people to claim the age-related allowances. To accurately calculate a person's tax allowance, the Department requires them to complete a claim form with details of their expected income for the year ahead. Older people do not find the claim form easy to complete because they do not understand the questions or do not know their expected pension income.[5] This had led to errors in 19% of claim forms, costing the Department an estimated £13 million a year in staff costs to administer the allowances including £1.1 million a year on contacting people to obtain missing information. The Department had improved and shortened the guidance it issues with the claim form. It considered this had reduced the error rate to 10%.[6]

4.  The Department sends claim forms to individuals who it knows are about to reach age 65, or receive the State Pension or an occupational pension. Some people do not receive a claim form because the Department has no record of their address. This might be because they have not worked or claimed benefits and so have no previous contact with government, or because they have not informed the Department of a change of address. Once someone starts claiming the State Pension, the Department for Work and Pensions informs the Department if they have a tax reference number. However this is an imperfect means of ensuring that the Department knows of everyone who should receive a claim form as some people, particularly women, have never had such a tax reference number.[7]

5.  Entitlement to the age-related allowances depends on an individual's income. The Department considered it could not award the allowances automatically without creating a risk that individuals would receive allowances to which they were not entitled, leading to underpayments of tax which would then have to be recovered.[8] The Department was considering other ways to make it easier to claim the age-related allowances, such as claiming the allowance by email. It was also working with the Department for Work and Pensions to confirm whether it would be feasible to share relevant information. The Department for Work and Pensions has undertaken extensive work to encourage older people to claim benefits. The Government's recent strategy 'Building a society for all ages' contains proposals to streamline the Pensions Credit claims process by making better use of information the Government already has to make awards automatically.[9]

2   C&AG's Report, HM Revenue & Customs: Dealing with the tax obligations of older people, HC (2008-09) 961, paras 1, 6, 2.5 and 2.10 Back

3   Q 9; C&AG's Report, paras 8, 3.3 and 3.19 Back

4   Qq 2, 3, 6 and 123; C&AG's Report, paras 3.8 and 3.20 Back

5   C&AG's Report, paras 3.4 and 3.5 Back

6   Qq 21 and 114; C&AG's Report, paras 8 and 3.5 Back

7   Qq 23-25; C&AG's Report, para 3.4 Back

8   Qq 10-12; C&AG's Report, Box 2 (page 17) Back

9   C&AG's Report, paras 3.6 and 3.7 Back

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