Apparently, 60% of pensioners are unaware that their State Pension is taxable income. Historically this assumption is probably based on the way in which their pension is paid – without deduction of tax. This may be about to change!
The Office of Tax Simplification has come up with an idea to streamline the taxation of pensioners. They are seriously considering bringing the State Pension into the pay-as-you-earn system.
If this happened HMRC would issue a code number to the Department of Works and Pensions who would calculate any tax due and deduct it before making the net of tax payment to a pensioner’s bank account.
If you have no other income apart from your State Pension you are unlikely to be affected. However, if your personal allowances are already used against other income (including other pensions) you would likely suffer a tax deduction. No change is proposed before April 2013.
How likely is this change? We will have to wait and see…
Overall, moving the State Pension into the PAYE system will not affect pensioners’ total tax liabilities. What it may affect, initially, is the timing of tax payments. At present any tax that should have been paid will be collected through the self-assessment process. Any arrears for each tax year will need to be settled the following January. So any tax underpaid in 2011/12 would have to be paid 31 January 2013. If PAYE is applied to the State Pension from April 2013, pensioners may be faced with budgeting to clear any arrears for the tax year 2012/13 in January 2014, from a reduced monthly income. This of course will be a one-off issue.
If you are a basic rate tax payer and your tax allowance is set off against other earnings or pensions, your weekly State Pension will be reduced from £107.46 (the present weekly rate) to £85.96.
If you pay tax at 40% and your tax allowance is set off against other earnings or pensions, your weekly State Pension will be reduced to £64.47.