Elderly may get a simpler system for paying their tax

Government tax advisers have suggested that the UK’s tax system should be simplified for pensioners.

The Office of Tax Simplification (The OTS) has been reviewing how pensioners pay tax. The OTS was set up in July 2010, soon after the Coalition came to power. Its proposals must be approved by the Chancellor, who could announce his decision in the Budget in March.

The OTS has asked that the elderly receive a colour-coded letter each year that will clearly explain all their tax codes. They criticised the current system, judging tax codes as being confusing and leaving people, especially older people, unsure of how much tax they should pay. Tax codes consist of a series of letters and numbers which formulate how much tax should be paid, no literature to explain the tax code is provided to its recipient though.

The OTS claim it is unnecessary and confusing for people to move from ‘simple’ to ‘complex’ tax affairs upon retirement, especially for those who have worked under the pay-as-you-earn system and therefore never been responsible for paying their own tax previously.

Many pensioners have complained that they are left bewildered by the different codes that HMRC send them for different sources of income such as pensions and savings interest. Often the elderly claim they are shocked when they receive a tax bill in the post as they do not understand what they owe the money for.

The new system The OTS has proposed is one whereby each pensioner will receive a ‘Form P2C’ letter outlining the code(s) for each source of income they have. They  have also requested that a new form entitled ‘DWP60’ is sent out at the end of each tax year to explain how much tax pensioners should have paid on their income over the previous year.

A more contentious proposal by The OTS is the proposal to eradicate the 10 per cent savings rate, a scheme whereby people can pay lower tax on savings income of up to £2,710 a year. The OTS has suggested scrapping this scheme as they claim it has little effect on incentivising savings. HMRC figures, however, show that around 525,000 people, many of whom are pensioners, claim the rebate and argue that scrapping it would lose them around £90 a year. In order to offset this change The OTS suggests that the annual tax-free ISA limit is increased, although they do not propose how big this one off increase should be.