Pensioners bear brunt of Revenue errors

Hundreds of thousands of pensioners are overpaying tax because of Inland Revenue failings, it emerged yesterday.

Many pensioners, who were unashamedly wooed in last week's pre-election Budget, are not receiving tax allowances they are entitled to because incorrect tax code notices are being issued. The errors result from a variety of problems, including the wrong amount of state pension being paid, wrongly missing out on higher personal allowances from age 65, and failing to receive the married couple's allowance.

John Andrews of the Low Incomes Tax Reform Group said that the form P161 is at the heart of the problem. It is sent to pensioners by the Revenue when they reach retirement to garner details of their income.

The Department for Work and Pensions tells the Revenue when someone is due to reach 60 or 65, and the form should then be sent out. But Mr Andrews said many pensioners do not understand the importance of the form, and that others are not receiving it. In some cases, women do not get the form until they have been receiving their pension for around five years, said Mr Andrews, and it does not appear relevant to them.

However, if the form is not completed, the Revenue assumes the pensioner is not entitled to the age allowance - a more generous allowance given to pensioners before they start to be taxed on their income. Mr Andrews added: "Nearly all of these problems arise due to Revenue or DWP processes and a lack of effective liaison between the two. All of these issues can lead to pensioners landing themselves in debt unexpectedly.

"There is no clear explanation given to taxpayers as to why this form is being issued and why it is essential to have it completed quickly, so the completion rate is not very high."

Losing the age allowance in error can lead to significant financial loss. For example, for the 2005-06 tax year the age allowance will be £7,090 for those aged 65 to 74, and £7,220 for those aged over 75. The normal personal allowance will be £4,895.

However, if a pensioner has income of more than £19,500 for 2005-06, this age allowance is chipped away at £1 for every £2 of income over this threshold, back to the basic personal allowance. This gives an effective marginal tax rate of 33pc, said John Whiting, tax partner at PricewaterhouseCoopers. Mr Whiting added: "This highlights that the Chancellor gives with one hand but takes it away with the other."

A Revenue spokesman said the form does state that not returning it could result in the wrong amount of tax being paid.

He added: "The Inland Revenue works very closely with pensioner representative groups to continually improve the levels of service we provide to our customers. We want pensioners to pay the right amount of tax and are continually reviewing our processes to ensure all our communication with our customers reflects their needs."

However, David Willetts, the shadow work and pensions secretary, said: "This is a serious problem. A lot of pensioners are not even aware of the higher personal allowance they can enjoy."

Steve Webb, the Liberal Democrat spokesman for work and pensions, added: "If a pensioner is not getting this allowance and they should, that is a slice of income they are being taxed on at 22pc. That is serious money."