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State pension could be taxed at source

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.



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There are 3 comments at the moment, we would love to hear your opinion too.

  1. The government’s need to simplify benefits and taxation might well be best served by making the basic pension tax free, releasing all those OAPs from form filling and the Revenue having to put it all right. Osbourne could then abolish the seperate allowance for over 65s straight away and unify tax allowances. He might molify the Liberals by doing this and be able to slow down indexation on allowances to compensate. In conjunction with a national minimum tax percentage, below which avoidance could not take you, giving the Revenue a break, this could all be solved, assumimg the arithmetic works. But what of poloitical courage.

  2. Yes why not, we can’t get any tax out of millionaires, banks or the likes of Amazon so why not tax the elderly.

    A brilliant idea.

  3. More work for more people and potential mistakes by their computer.

    In all the years I have been in the industry I have found very few people whos state pension exceeds their allowance, so why mess with it. The majority of tax comes from additional pensions and as long as it is taxed bythe provider there appears to be no problem, except when the HMRC start messing about with things.

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