Thursday, January 13, 2011

Tax troubles: Seems there really has been a PAYE mess up after all

Seems there has been a real glitch in the PAYE system after all - at least in so far as it relates to the taxation of pensioners who have secondary pensions in addition to the state pension.

When the PAYE debacle became apparent over the summer I wrote a piece: The PAYE tax system is now working as it should...

I stand by the explanation I gave and continue to deplore the ill-informed and sensationalist reports in the media.

However, NOW it seems that there has been a real and widespread error on the part of HMRC. The reports I have seen so far seem to simply see it as more of the same. In fact it's much more fundamental.

The latest PAYE failing is an announcement that during 2008-9 and 2009-10 state pension income was omitted from the tax codes issued to 250,000 pensioners with second pensions or other earned income. The state pension is taxable; the tax due is normally collected through the tax code used to calculate the net income from their second pension. Where insufficient tax has been paid in such cases, the Government has announced that pensioners will not be asked to pay up.

This error may well be a symptom of the staff cutbacks imposed on HMRC by the previous Government. To reduce the burden on the remaining staff, HMRC started to write to taxpayers on PAYE saying that they need no longer file tax returns. This was welcomed by those who saw it as a chore. Accountants anticipated that it would mean that some taxpayers would miss out on tax repayments as no one would be checking whether they had under or over paid tax. What also seems to have happened is that someone somewhere in HMRC didn't programme the computer to include the state pension in PAYE codes for pensioners who no longer filed tax returns. Whoops!

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