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

2 Administering tax for older people

6.  Most older people who are taxpayers pay tax through Pay As You Earn (PAYE). PAYE is complex, but the Department considered it was an effective system for dealing with the tax of most people. Employers and pension providers deduct tax according to a tax code calculated by the Department for each individual. The tax code is used to allocate a person's tax allowance between each source of income, meaning those people with multiple income sources receive several coding notices. The alternative to issuing tax codes would be to require everyone to file a tax return each year, as is the case in some other countries.[10]

7.  Eighty per cent of older people paying tax have multiple sources of income such as the State Pension, occupational pensions and part-time employment. They consequently receive more coding notices on average than other taxpayers. When someone receives several coding notices it can be difficult for them to check that they are paying the right amount of Income Tax through PAYE. Some 20% of complaints to the Department from older people are about their tax code. The Department recognised that the coding system was complex, but saw it as necessary to ensure the right amount of tax was collected, no matter how complicated an individual's tax affairs were. The Department aspired to produce a single document once a year bringing all of an individual's tax coding notices together, but it had not set a date for achieving this.[11]

8.  Discrepancies can occur between the tax shown as actually paid by an individual on their employers' or pension providers' returns and the amount the Department's records show that person should pay. In March 2009, there were 20 million 'open cases' where the Department had yet to resolve such discrepancies including around 6.6 million relating to older people. Of these cases, an estimated 1.5 million older people had overpaid tax of £250 million, and 500,000 had underpaid tax of £100 million. In November 2009, the Department reported that the total number of open cases had reduced to 17 million but that it would not be able to start clearing this backlog until its new PAYE systems were fully operational in 2010. The Department acknowledged the importance of clearing the backlog and of giving priority to those cases where it believed it owed tax refunds.[12]

9.  The Department estimates that some 2.4 million older people have paid around £200 million more tax on their savings income than they need to. Many, however, do not realise that they may be able to claim back part of the tax paid or that they can claim to receive interest on their savings gross of tax if their income is below the personal allowance.[13] The Department ran a campaign in 2004 to inform older people they could claim back tax on their savings and launched a further campaign in autumn 2009 targeted at Pension Credit claimants. It had experienced difficulties in encouraging individuals to claim refunds of tax and was disappointed with the limited success of its recent campaign. While it was appropriate to target this group because of their low incomes, they had not responded in large numbers to previous take-up campaigns. The campaign had so far resulted in repayments of £51 per person on average. Though relatively small, repayments on this scale could nevertheless provide a significant benefit to older people on lower than average incomes.[14]

10.  The Department recognised that older people on low incomes were particularly hard to reach. There were sensitivities in getting banks and building societies to explore whether people were eligible to receive interest gross of tax. They would need to be aware of other tax liabilities to know whether someone should receive savings interest gross of tax, and people may wish to keep that information private. Legislation would be required before the Department could mandate banks and building societies to provide advice of this sort and it foresaw dangers in asking third parties to carry out such a role. The Department was, therefore, working with third sector groups such as TaxHelp for Older People to find better ways to target this hard-to-reach group. The Department needed to do more work to help older people understand whether they were eligible to receive tax back on their savings interest or to receive savings interest gross of tax.[15]

10   Qq 15, 34 and 105; C&AG's Report, paras 1.3 and 2.2 Back

11   Qq 14 and 36; C&AG's Report, paras 7, 14e, 2.5, 3.10 and 4.6 Back

12   Q 107; Committee of Public Accounts, Second Report of Session 2009-10, HM Revenue & Customs: Improving the Processing and Collection of Tax: Income Tax, Corporation Tax, Stamp Duty Land Tax and Tax Credits, HC 97, para 7; C&AG's Report, paras 2.2 and 2.3 Back

13   C&AG's Report, paras 3.11-3.13 Back

14   Qq 7, 26 and 27; C&AG's Report, para 3.13 Back

15   Qq 8 and 29-33 Back

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