This was the headline in the Daily Mail article of 4 July 2007, complete with a picture of a vampire! The story outlines how pensioners on low incomes are being taxed up to 40% in what the Mail describes as “an extraordinary cash grab by HM Revenue & Customs”.
Under “trivial commutation” rules, pensioners with pension funds of £16k or under can actually cash them in instead of using them to buy annuities which would, of course, pay ridiculously small monthly amounts. As you might expect, the first 25% of the pension fund taken as cash comes tax-free. It is the other three-quarters which fall foul of HMRC’s cash grab. While most of the pensioners involved are basic-rate tax payers, many have this portion of the fund taxed at the higher 40% rate by the Revenue.
The reason for this ludicrous state of affairs is that, even more absurdly, if HMRC does not have a pensioner’s tax details, they assume the pensioner receives this amount of income every month and apply an emergency 40% rate charge to the top three-quarters of the fund. Pensioners who realise the mistake are then left to try to reclaim the overpayment, however many of them will not know how to even start such a claim as some will not have dealt directly with the tax system before. It is thought that up to 50,000 pensioners will be hit with this overcharge each year.
Walk-in accounting services provided by companies such as TaxFile in Tulse Hill are perfectly placed to offer low cost solutions to this type of tax error. When it comes to tax advice, they are a low cost alternative to a full accountancy firm and even the playing field between ordinary folk and Her Majesty’s Revenue & Customs.