The changes, which are buried in the small print of the Finance Bill 2008, are not only basically unfair but they also restrict the value that advisers can give to clients by delivering expert advice on finances past and present.
The proposal is particularly unfair in light of the fact that the Revenue wants to keep the right to claim back taxes it deems as due for six years. It wants a four-year limit for the rest of us, even in cases where the overpayment is down to errors it has made.
A report by the National Audit Office found that for the 2006/07 tax year, more than half a million people paid too much tax, totalling £156m. No doubt some of this sum is caused by blunders by the taxman but a considerably higher proportion is likely to be down to people simply not understanding the labyrinthine tax system in which we are forced to exist.
The Low Income Tax Reform Group has rightly said that many people on low incomes, particularly the elderly, often end up paying too much tax. It points out that overpayments can be caused by incorrect tax codes, 20 per cent interest deducted on the savings of those with low income and not claiming age-related allowances. But the ramifications for high-earners are equally serious and significantly more important in purely monetary terms.
As I pointed out in this column several weeks ago, up to half a million higher-rate taxpayers who are members of group stakeholders and GPPs are not getting their higher-rate tax relief back because they presume it is paid back automatically. For some reason I cannot fathom, unlike those in money-purchase occupational schemes, they have to claim it back themselves. I believe that if all these people are taken into account, the NAO’s figure of overpaid tax (or unclaimed rebates in this case) would far exceed the £156m it recorded for 2006/07.
Those who have good IFAs and accountants or who fill in a tax return are getting their relief. But many more are not and for somebody on £60,000 a year paying 10 per cent of salary into their workplace pension, not claiming that relief means missing out on a cash in hand payment outside of the pension of £1,200 a year.
Currently, that individual can claim back rebates for six years’ contributions, giving a total rebate of £7,200. The Revenue’s proposals would slash that figure by £2,400. The Revenue should not restrict claims for the repayment of money it should never have received in the first place.
Lack of understanding of the taxpayer does not stop at the man in the street. I have been writing about pensions for eight years, yet rarely have I heard it mentioned that higher-rate taxpayers in contract-based schemes need to claim back their higher-rate relief. In fact, several high-level figures in both providers and advisory firms did not know this was the case. The reality is that the public have virtually no chance of understanding what they have to reclaim unless they have a switched-on adviser acting on their behalf or their employer spells it out for them.
But it is not just high earners who are missing out on tax relief. Those on low incomes, particularly the elderly, who should pay no tax at all on the first £9,030 of income, rising to £9,180 for the over-75s, are often paying too much to the taxman. Charity Tax Help for Older People recently carried out research on 80 of its most recent refund claims and found that 44 per cent of claims went back six years and the average claim was for £327 a year.
The Revenue’s proposals will therefore exclude these confused elderly people on low incomes from rebates of more than £600 to which they are legitimately entitled.
The Low Income Tax Reform Group says it regu larly comes across pensioners in their 80s who have never had the benefit of age allowances and have therefore been overpaying tax for 15 years or more. If anything, the Revenue should be extending the time limit for bona fide errors, not reducing it.
Tax relief is one of the cornerstones of the industry and claiming back tax is an important tool in an adviser’s armoury, which is why anything that restricts it should be resisted by the profession.
John Greenwood is editor of Corporate AdviserMoney Marketing