The Government is preparing for a fresh row over pensions after the Office for Tax Simplification suggested it is likely to recommend taxing state pensions before they are paid out.
In an interview with the Independent, OTS tax director John Whiting said bringing the state pension inside the PAYE tax system was the “front-runner” out of 12 options being considered to streamline the tax system for pensioners.
The state pension rose from £102.15 to £107.45 yesterday. It is taxable but it is not currently paid net of tax as pensions from private providers are.
Whiting said: “There is poor liaison between the DWP and HMRC, so tax on your state pension has to be captured by fiddling with your tax code. One result is that a lot of pensioners [1.6 million] get drawn into self-assessment, filling in forms, mistakes are made and it is a big source of problems.
“The obvious solution is to apply PAYE to the state pension. DWP would become like another pension provider [by paying pensions net of tax]. There is potential for better explanation and better information flow, more joined-up payments and less chance of errors. Fewer pensioners would end up filling out tax returns.”
He said the OTS would also consider the administrative cost for the DWP of putting UK’s 12 million pensioners on PAYE. About 5.6 million of them pay tax, while the rest have an income below the tax-free threshold which is currently £10,500 for 65 to 74 year olds and £10,660 for those 75 and over.
The proposal comes after the Government was attacked for freezing the personal allowance for pensioners in a move that was dubbed a “granny tax”.
National Pensioners Convention spokesman Neil Duncan-Jordan says: “It is totally unnecessary. Pensioners are feeling persecuted. It is just not the case that they have escaped the austerity measures.”
Whiting said the change would cause some “cash flow issues” for some but over time pensioners would be no worse off.