HMRC To Change Taxation Of Retirement Annuities

by Jason Gorringe, Tax-News.com, London

12 January 2007

Around a million UK pensioners who receive retirement annuities will be contacted over the next two months to remind them of changes to the way HM Revenue & Customs (HMRC) will tax their annuity income, the tax authority announced this week.

Retirement Annuity Contracts (RACs) have existed since the 1950s but no new contracts have been entered into since the introduction of personal pensions in 1988. Contracts in existence in 1988 were able to continue to accept contributions. Contributors tended to be the self-employed or company directors.

From 6 April 2007, retirement annuities will be taxed through Pay As You Earn (PAYE). This is intended to ensure that just the right amount of any tax is taken off - so long as HMRC has up-to-date information from the pensioners.

From this month, HMRC will start sending out letters, leaflets and forms to pensioners who receive annuity income, to explain how the change will affect them.

HMRC explained that:

"Currently, unless pensioners have told HMRC that they are not liable to pay any tax on their total income, the company paying their retirement annuity deducts basic rate income tax of 22%."

"This means some pensioners have ended up paying too much tax, and have had to claim it back every tax year. Some may not even know that they have paid too much tax, and HMRC is helping them to claim any repayments which can include up to six tax years."

"Conversely, some pensioners may have under-paid tax, particularly where their retirement incomes have gone up since they first told HMRC that they were not liable to pay any tax."

Mike Shipp, HMRC`s Director of PAYE, added:

"The change means that every pensioner need only pay the right amount of tax from April 2007 onwards, and there will be no need to make repayment claims every year."

"Where we find that a pensioner`s circumstances have changed and some tax should have been paid in the past, we won't be asking anyone to pay us that tax, unless there has been a deliberate attempt to make false statements or tax returns."

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