The Office for tax Simplification (OTS) has put forward options for simplifying the tax that pensioners face with one being to scrap income tax for the state pension.
The latest report from the OTS (Review of pensioners’ taxation: Interim report) looks at ways in which the tax system could be simplified when looking at the diversity of pensioners and the confusing ‘patchwork of allowances and rules’ that cover them.
The option to take the state pension out of the list of taxable incomes has been made a lot of by some in the media but it is worth bearing in mind that, before mentioning\it, the report says that “None of the options below should be taken as recommendations of the OTS at this stage, but for completeness the discussions have included: .…”
So it is not a recommendation or a push, it is just one of some options. The full list of options regarding this matter is as follows:
- leave the system as it is but explain it better to taxpayers (this applies to both HMRC and DWP);
- improve the communications between HMRC and DWP;
- exempt the state pension from tax altogether;
- get the DWP to operate PAYE on the state pension (universally, or in cases where total state pension exceeds the personal allowances);
- issue a ‘P60’ equivalent form for the state pension at the end of the tax year, clearly showing the amount of taxable state pension and any other taxable benefit; and
- change the basis of taxation of the state pension from an entitlement basis to a receipts basis, thereby overcoming problems of working out the amount of state pension to be taxed, which can be a particular problem in the first year of payment and when payments are made four or 13 weeks.
It is also worth bearing in mind that this is a tax simplification measure, not a tax raising or tax reduction measure. It should really therefore be tax neutral to both the Treasury and the target taxpayer. You would almost certainly then see a reduction over time (if not immediate) of the state pension so that in the end nothing effectively changed except that the taxman’s job got easier and pensioners had fewer forms (if any) to fill in.
So maybe the Treasury would not need to find the mooted extra Â£5 billion from other sources to pay for it.
Even if it were to go ahead with no reduction in the state pension amount, the benefit would only be felt by those who receive enough total income to take them above the initial tax threshold so the very poorest would probably not benefit anyway.
At the end of the day, given that the Chancellor needs every grubby penny he can get hold of and that cutting pensions (even if it was revenue neutral to take the state pension out of the tax bracket) is political suicide I don’t see this one leaving the hangar, let alone getting to the take off and flying stages.