The Office of Tax Simplification has made a range of recommendations in a bid to make tax simpler for Britain's pensioners.
The independent body looked at the elements of tax that cause the most complications for pensioners, including tax on savings, the married couple's allowance and administrative aspects.
The OTS recommended simplifying the married couple's allowance to remove the current income abatement system and streamlining administrative aspects, replacing it with a flat-rate payment for those still eligible.
It also called for a refocus on savings incentives, finding the current 10% savings rate to be a great source of complexity and ineffective, with both low awareness and low take up levels. It said it would be much simpler and more effective to abolish the 10% savings rate and use the money saved to increase ISA limits.
Finally the OTS suggested the blind person's allowance be revised as it said the payment is currently poorly targeted; those with no income tax liability do not benefit.
Ideally, the OTS said the BPA should be revised to provide direct grants and support for all those registered blind and that in any event, it needs to be simpler to claim.
The OTS also recommended a number of administrative changes:
Better tax information for pensioners
The OTS recommends that the Department for Work and Pensions issues an annual statement setting out the amount of taxable income received from the state pension and social security benefits in the tax year. This form, a "DWP60", would parallel the P60 that employers and other pension providers have to give recipients and would ensure pensioners know what taxable income they are receiving.
Simplify tax coding notice process
To address the confusion faced by many when they receive multiple PAYE coding notices from HM Revenue and Customs (HMRC), the OTS recommends HMRC issues consolidated coding notices (‘form P2C') setting out all of a pensioner's tax codes and showing how the personal allowance is used.
Among several admin improvements, OTS recommends banks and building societies ask annually if the tax status of a savings account is correct, ensure account holders have correct guidance on tax on interest, and that HMRC creates an online portal to submit form R40 which allows pensioners to claim back the tax they may have paid incorrectly on their savings.
OTS tax director John Whiting said: "Pensioners have told us many times how the tax system gets more complex as they get older. We have to work within our brief to be revenue-neutral, but we think our recommendations could make a real difference in stripping away complexities and giving pensioners information that will help understanding and make it easier for them to deal with their obligations.
"One great source of complexity is the way the state pension is taxed. Bringing this into the PAYE system would cause lots of problems and exempting it from tax, whilst attractive to recipients, would be unfair on other taxpayers and costly for the government. So we've focused on coming up with sensible solutions that could provide real help in making it easier for millions of pensioners to deal with their tax responsibilities."
The OTS report built on an interim report last year, which is already leading to improvements in HMRC service to pensioners.
This final report with recommendations has been published on the website and has been put to the Chancellor of the Exchequer for consideration.
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