Government may tax state pension at source
As part of its plans to simplify the tax system the Government may start taxing State Pensions before they are paid out.
Pensioners whose taxable income, including their State Pension, exceeds their tax-free personal allowance, still have to pay income tax, although it is estimated that only 40 per cent of pensioners realise that their State Pension is taxable.
Out of the 12 million pensioners in Britain, around 5.6 million have income above the tax-free threshold, and therefore have to pay tax, which is claimed through their tax code.
Just before people reach state pension age they are required to give details of their income to HMRC on a Pension Coding form in order to ensure they are paying the right amount of tax.
Bringing the state pension inside the pay-as-you-earn system (PAYE) tax system would bring it in line with pensions from private providers, which are already paid net of tax.
It is expected to reduce the need for pensioner to fill out self-assessment forms and reduce errors.
However the move has been attacked by pension and consumer groups, and opposition MPs, with the proposal being labelled the ‘granny tax 2′ and concern that it would increase administrative costs.
Director of the Office of Tax Simplification, John Whiting, has admitted that it could cause cash-flow issues for some pensioners, although they would be no worse off over time.
It has also been revealed that the Government is devising a new type of guaranteed pension which would help to replace final salary schemes.
Many employers have been forced to close final salary schemes because they are too expensive.
It is therefore talking to major employers over the creation of ‘defined ambition’ pensions which would share the risks between employer and employee but provide a measure of certainty over the income received on retirement.