Pensioners at risk of incorrect PAYE coding

Pensioners are more likely to over-pay tax on their income than other taxpayers as a result of incorrect pay-as-you-earn tax codes, warns accountancy and investment management group Smith & Williamson.

The Office of Tax Simplification records show that around 5.6m pensioners currently pay tax in the UK, with many of these individuals receiving pensions from a number of different sources and of varying amounts. Mistakes often arise because each of these pensions, apart from the state pension, will have a separate PAYE code.

“Pensioners’ tax is further complicated when individuals receive interest and dividend payments which are automatically taxed at standard rate and a large proportion are also in paid employment,” said Richard Mannion, national tax director at Smith & Williamson.

“Layers of complexity also arise as the personal allowance available to pensioners varies depending on their age, total income and possibly their married status. As a result, pensioners are among those most risk of getting the wrong PAYE code.”

Mr Mannion predicts that there could be thousands of pensioners paying either too much or too little tax and adds that unless a taxpayer is in self-assessment, he or she, or HMRC will have to carry out an end-of-year reconciliation to arrive at the correct final position.

“Where tax has been underpaid, the PAYE code must be adjusted for the following year to enable the tax underpayment to be collected,” he said. “As a result, the whole process gets horrendously confusing.”

The Office of Tax Simplification has said it recognises the difficulties and is considering how the tax matters of pensioners can be improved.

However, experts warn that for the time-being the message has to be that pensioners should seek help with their tax affairs as soon as they start to get complicated. Help is available from the likes of Citizens Advice Bureau and TOP (TaxHelp for Older People).

Mr Mannion says that to remedy the situation, taxpayers could opt into self assessment but warns that this may not appeal to everyone.

“In an ideal world, we would return to the era when a taxpayer’s affairs were looked after in a local tax office by a named Tax Officer who would give individual attention,” he said. “However with even more cuts to come in HMRC’s staffing this is just not going to happen.”

The warning follows a succession of high-profile administrative problems at HMRC earlier this year, such as incorrect PAYE codes being issued to taxpayers and lengthening delays for value added tax registrations, and rebates for overpaid tax.

PAYE coding errors meant the Revenue collected £238m extra tax in 2009-10, up from £96m in the tax year for 2008-09. Incorrect tax codes also led to under-collected tax of £132m from other taxpayers in 2009-10

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