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Page last updated at 14:08 GMT, Saturday, 31 May 2008 15:08 UK

Treasury delays small pension tax

By Paul Lewis
BBC Radio 4's Money Box

John Whiting, adviser to the Low Incomes Tax Reform Group
John Whiting feels this year's liability should have been written off

The government has scrapped plans to tax 420,000 retired people on small pensions which they received in 2007/08.

But it will still impose the tax from this year and will not tell the individuals affected until 2009.

The tax will not actually be collected until 2010/11 - which will double the tax due in that year.

Campaigners say the change is welcome, but add the government should have scrapped the tax for this year as well.

An ideal world

Sally West, Policy Manager at Age Concern, told Money Box on BBC Radio 4: "It is good news that pensioners are not going to pay tax for 2007/08.

"We're really pleased the government has listened.

"But people will still have to pay back tax for 2008/09 and they are not yet aware of this.

"In an ideal world we would have liked this year's tax to be written off as well."

The problem was caused by a Revenue concession stretching back more than twenty years.

Pension providers were told not to bother collecting any tax on "small" pensions - normally those around 1,000 a year or less.

We are looking at how we are going to tell people.
Revenue spokeswoman

But many of those people should have paid tax - and recently the Revenue decided to end the concession and collect it.

Until this week it was planning to backdate the tax to 2007/08.

But campaigners pointed out that meant up to 420,000 people would get a tax bill of up to 300 on income they were used to receiving tax-free.

Future years

Late on Friday 30 May, Treasury Secretary, Jane Kennedy, wrote to Age Concern to say she had "asked HMRC to carefully consider again their proposal."

As a result the Revenue had decided to "draw a line under 2007/08."

But she warned "there will, in many cases, be an underpayment from 2008/09 which will need to be collected in future years."

The Revenue confirmed that tax would be due but not collected on pensions in 2008/09.

In 2009/10 tax for that year would be deducted from the pension.

And in 2010/11 the tax for that year and the arrears for 2008/09 would be collected each month.

That would mean a pension of 1,000 would be paid in full this year, would have 200 tax deducted in 2009/10, and in 2010/11, would be paid after deducting 400 in tax.

Breaking the news

John Whiting, an accountant and member of the Low Incomes Tax reform group, told Money Box:

"The Revenue has decided to turn on the taxing tap this year.

"But they are not going to tell people because they don't know exactly who they are and won't know until later in the tax year.

"It would have been much fairer if they'd written off this year's liability as well."

A Revenue spokeswoman told the BBC, "We are looking at how we are going to tell people.

"We'll get the information in the middle of 2008/09.

"So they will be told about it towards the end of the tax year."


BBC Radio 4's Money Box was broadcast on Saturday, 31 May 2008 at 1204 BST.

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SEE ALSO
External internet links
31 May 08 |  Moneybox
Minister scraps pension target
29 Mar 08 |  Moneybox
Minister ponders pension tax help
15 Mar 08 |  Moneybox


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