Many UK Pensioners Paying Too Much Tax

by Robert Lee, Tax-News.com, London

27 October 2009

Significant numbers of pensioners in the UK are paying too much or too little tax because the tax department's systems are not geared to dealing with the more complex nature of their tax affairs, according to a report by the National Audit Office (NAO).

According to the NAO, errors occur because individuals' tax affairs tend to become more complicated when they reach pension age, and HM Revenue and Customs's (HMRC) systems do not cope well with their multiple sources of income.

The NAO estimates that, by March 2009, as a result of discrepancies between HMRC’s records and tax deducted by employers and pension providers, some 1.5 million older people had overpaid tax by an average of GBP171 (GBP250m in total), and around 500,000 older people had underpaid tax by an average of GBP207 (GBP100m in total).

Older people may also be paying more tax because they do not claim additional age-related tax allowances, according to the report. The NAO estimates that some 3.2 million older people do not claim the additional allowances. Some may not claim because they do not have sufficient income to pay tax, while others do not realize they are entitled to them.

While older people are less likely to contact HMRC for help than other taxpayers, 36% of this group are likely to misunderstand their tax obligations, compared with 26% for all taxpayers, the NAO found.

Moreover, when older people contact the Department, the NAO estimates that each enquiry costs twice as much to deal with as enquiries from other taxpayers because they tend to be more complicated. HMRC spends around GBP36m per year in staff costs on dealing with enquiries from older people.

Because demographic changes are likely to increase the pressures and costs for HMRC, the NAO recommended that the department rethink its approach to ensuring that older people get the financial support to which they are entitled.

"Older people want to pay the right amount of tax but too many pay more than they need to because they do not claim allowances to which they are entitled and because of errors," observed Amyas Morse, head of the NAO.

"By providing a more coherent service, HMRC could make substantial savings as the number of enquiries from older people about their tax affairs would reduce. A win-win situation for all."

Recommended