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HMRC writes to pensioners hit by annuity tax changes

HM Revenue & Customs says it will contact all clients receiving income from a retirement annuity who will be hit by changes to the way their annuities are taxed next year.

From April 2007 all retirement annuity income will be classed as pension income and taxed under the PAYE procedure.
The change brings retirement annuities into line with personal and occupational pensions.
Under existing rules unless the annuitant has completed a form confirming that they are not liable to pay any tax, annuity providers deduct tax at a basic rate from annuities at source. This means some pensioners pay too much tax.
There are up to 1.2m individuals who are getting income from retirement annuity contracts. About half of them have claimed exemption from tax and so receive their payment gross. The rest have tax deducted at the basic rate, which is not a problem for basic or higher rate tax payers.
In January the Revenue will send a letter to up to 275,000 annuitants who are currently receiving their annuity gross, but who may find that from April 2007 they have some tax to pay because of changes in circumstances since the annuity was set up. But the Revenue estimates there are approximately 200,000 people who are paying too much tax. These people are not liable to pay tax or only liable at the 10 per cent starting rate who are having basic rate tax deducted from all of their annuity.
The Revenue has set it will not try to recover any tax arrears unless there is evidence of deliberate tax avoidance. In February it will send every annuitant a letter telling them how their PAYE tax code number has been worked out.
Standard Life marketing technical manager Andy Tullly says: “It makes sense that retirement annuities are paid and taxed in exactly the same way as other pensions. However, it is very important that people who have been paying basic rate tax on their pension, but should only have been paying tax at a lower rate, or not at all, act quickly to get their overpaid tax back. People have five years from 31 January after the end of the relevant tax year in which to claim, otherwise it won’t be possible to get their money back from the Revenue.”


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