TaxHelp for Older People: This can’t be right… Can it?

This guest post is by TaxHelp for Older People, a national charity offering free tax advice to older people on incomes below £17,000 a year. The Helpline number is 0845 601 3321.

“I pay tax every month, how can I owe that much?” is the cry we hear daily at this time of year as people receive their annual tax calculation (P800) showing an underpayment.

Last month we discussed how to check your calculation, and promised this month to help you through the process of challenging it where you believe that something is just not right.

There are three main reasons that you may want do this:

1. The figures do not agree with your own.
2. You think your employer or pension provider has done something wrong.
3. You believe that HMRC has all of your information but has not used it correctly.

In theory the first is the easiest issue to resolve. Just contact HMRC on 0845 300 0627 and give them the correct information. The P800 will be re-issued. If there is still an underpayment you may want to consider issues two and three.

The second issue is a bit harder to prove. It may be that your employer or pension provider has not operated PAYE correctly. For example, they may not have informed HMRC that you have started work, or if they did, have not operated the tax code HMRC have sent to them.

It can be quite tricky to spot a mistake, but looking for sources of income either not included in your calculation or tax codes or that are different from the coding notice issued to you (if you received any) are good warning signals.  If this is the case, HMRC should seek the underpaid tax from the employer or pension payer, not from you.

You will need to ask HMRC to carry out a regulation 72 investigation. If HMRC choose not to pursue the employer, they should issue you with a regulation 72 direction, which will give you a right of appeal.

The third issue is the hardest to prove.  If HMRC have made a mistake or failed to use information in their possession within a certain time, you can ask for the tax to be written off using their extra statutory concession A 19 (ESC A19).

This is not that useful for 2011/12 underpayments because HMRC has noticed the mistake within 12 months of the end of the tax year. But, if the underpayment is for earlier years, or if the mistake is continued over two or more years, it may still apply. There is no right of appeal against the final decision but you can still lodge a formal complaint.

Often it is difficult for the tax payer to determine where a mistake has occurred and it is wise to ask for both employer error and ESC A19 to be investigated from the outset.

Letters returned from HMRC can be very short telling you nothing, or conversely very lengthy and confusing. You may find it necessary to ask them to explain issues in more detail or to re-examine a particular point.

Don’t be afraid to continue pushing until you are satisfied with the response. And don’t forget, if you remain unhappy you are entitled to use HMRC’s complaint process, the Adjudicator and, if necessary, the Ombudsman.

TaxHelp for Older People: a yearly cycle

This guest post is by TaxHelp for Older People, a national charity offering free tax advice to older people on incomes below £17,000 a year. The Helpline number is 0845 601 3321.

This is the first year that HMRC have been able to issue pay as you earn (PAYE) customers with timely end of year reconciliations of tax due and tax actually deducted by employers and pension providers.

These annual reconciliations (form P800) form an important part of the PAYE operation. The (mainly) computerised process involves the taxpayer, the employer/pension provider and HMRC. Over the last few years this has been a painful process for some, but we hope that as the system settles down into its proper routine the problems will start to diminish.

Changes during the year can sometimes be difficult to deal with on time, leading to the wrong tax being deducted. The annual reconciliation will inform the taxpayer what information HMRC holds and will tally up the figures, indicating whether tax is owed or if a refund is due.

If you pay your tax via the self assessment process you should not receive an annual reconciliation calculation. If you do, then something is wrong and you need to contact HMRC.

We are probably all familiar with the term ‘rubbish in rubbish out’ and it’s definitely a phrase worth keeping in mind if you receive a P800. There are many reasons why the collection of tax can go wrong and incorrect data is very high on the list.

The coding system that collects the tax is another major player. It can easily become quite complicated and even a slight time delay has the potential to disrupt your tax. Add to this multiple incomes that can start at different times of the year as you reach retirement and you begin to appreciate the problems.

So what do you do?

Check everything. Question anything that doesn’t make sense! Even if you are due a refund.

1. Do you agree with the total income figure? Check this against your end of year certificates for employers and pension providers (P60s), certificate 975s from banks and building societies and dividend tax vouchers.
2. Have you been allocated the correct personal allowance? Should you have the married couples’ allowance? If yes, has it been restricted to £3,648 (2011/12)? Is your income over £24,000? Yes? are you 65 or over? Yes? Then is your age related allowance restricted? Are you entitled to the blind persons’ allowance?
3. Look out for adjustments. These often relate to underpayments of tax from earlier years. If there is one, do you agree that you had an underpayment? If yes have you enquired why the underpayment occurred? It might be HMRC or employer error and you may be able to appeal against it.

Even if you agree with the figures and an underpayment is due, do not automatically accept that this should come from you. It might be that the error was caused by your employer or pension provider, in which case you are entitled to ask HMRC to investigate or, if earlier years are involved it may have been caused by an HMRC error.

We will cover the details of this and other rights you have when it comes to underpayments in next month’s tax tips article.

TaxHelp for Older People: Easy money

This guest post is by TaxHelp for Older People, a charity offering free tax advice to older people on incomes below £17,000 a year. The Helpline number is 0845 601 3321.

If you use a car for work, you may be able to claim tax relief.

Do you use your own car for work, wear a uniform that you repair and clean yourself or have to buy your own specialist equipment like protective clothing?  If yes read on, you may be able to claim tax relief. The form is simple and sometimes people can make a claim over the phone.

If you use your car for work you will probably be paid a mileage rate for doing so. If the amount you receive is below the tax free rates then you are allowed to claim back the difference between these rates and the amount you actually receive.

What are the tax free rates I hear you ask? An employee can receive 45p per mile for the first 10,000 miles and 25p per mile thereafter without having to worry about tax. If more than £8,000 is received in a tax year it becomes a taxable benefit and the employer should produce a form P11D at the end of the tax year. An example will better explain how it works.

Mrs H works as a carer and clocks up 24,000 miles a year. Her employer pays her 23p a mile and she hasn’t a clue if this taxable or not. She is allowed 10,000 miles at 45p and 14,000 miles at 25p, totaling £8,000 tax free,  but she only gets 23p x 24,000, or a total of £5,520, and so she doesn’t have to worry about paying any more tax. But she can in fact claim tax relief on the difference between the two, which is £2,480. This is known as mileage relief and if Mrs H is a basic rate taxpayer she can claim tax relief at 20%, worth £496 for the year or an extra £41 per month. Well worth the effort!

Had Mrs H been paid say, 35p a mile, for all of the 24,000 miles she would have received £8,400 which is £400 over the tax free limit. In this case her employer would report the £400 to HMRC after the end of the tax year on form P11D and they would arrange to tax it, costing her £80.

If you are expected to care for your work uniform, you could claim tax relief.

The other tax reliefs that are worth knowing about are called flat rate expenses. If you work anywhere where you have to wear a uniform, or protective clothing that you repair and clean or replace yourself or you have to buy, maintain or replace specialist tools to do your work you will be entitled to them. The rates differ depending on the industry you are in and are calculated to cover what is typically spent each year by an employee in the different trades.

For example, Mrs H is expected to wear a uniform when she is working and which she is expected to look after. This means that she can ask HMRC for a flat rate expense of £60. It sounds really good, but in cash terms she will only receive the tax relief of £12 (£60 x 20%), still enough to pay for the soap powder. Had Mrs H been a cabinet maker she would have been able to claim £140.

The first time you claim a flat rate expense you need to put it in writing to HMRC, you can use form P87. For future years and if the amount you are claiming is under £1,000 you should be able to claim over the phone. If the claim is over £1,000 but under £2,500 you use form P87 and for claims over £2,500 you have to be in Self Assessment.

This article is by Tax Help for Older People (operated by registered charity no 1102276), offering free tax advice to older people on incomes below £17,000 a year. The Helpline number is 0845 601 3321 or geographical 01308 488066

TaxHelp for Older People: Jargon buster for pensions and taxation

This guest post is by TaxHelp for Older People (TOP), a charity offering free tax advice to older people on incomes below £17,000 a year. The Helpline number is 0845 601 3321. 

We all have different views about pensions. Some people have been in steady employment, have a company pension and are ready for retirement. Others are not so fortunate, have changed jobs frequently and have been in and out of pension schemes with little or no advice on how to manage them. Come retirement they then have a right old mess to sort out.

It will probably be the first time that they realise they have choices about what they can do and it will be unlikely that anyone has explained the rules very clearly. The paperwork received by most is littered with jargon, making it all very confusing. It is not surprising that many people get caught out and end up with large tax bills.

We find that just understanding the jargon helps.

Trivial Commutation – To take a pension as a cash lump sum rather than a regular payment.

Commute – As above.

Annuity – A pension (regular payment) purchased from money saved in your pension plan.

Pension Pot – The name given to the money you have accumulated in a pension plan.

25% tax free lump sum – The part of your pension plan that is tax free. Only 75% of the savings in a pension plan are taxable – the % can differ on some of the older schemes

Lifetime allowance – The maximum amount you can pay into a pension over your lifetime.  It currently stands at £1,500,000.

1% Lifetime allowance – Known as the small pot limit. If all your pension pots added together total more than this figure you cannot commute any of your pensions. The limit is currently frozen at £18,000. There are a few exceptions to this rule; it is possible to commute certain company pensions with a pot size of £2,000 or less regardless of the £18,000 limit and from 06/04/2012 you can commute up to two personal pensions in your lifetime providing the pot size is £2,000 or less.

12 month rule – Once you have commuted your first pension you have 12 months in which to commute any others. After this time they become unauthorised payments and may attract a hefty tax charge of up to 55%.

As you approach your 60^th birthday you will be approached by your pension plan provider/s. This can be your employer or an insurance company. You will be given choices:

• Do you want to take your pension now?
• Do you want to take a 25% tax-free payment and a lower yearly pension rather than a larger yearly pension?
• Do you want to commute your pension?

If you decide to commute your pension it is important that you think about all your pension pots and check that they do not exceed £18,000 in total. As an approximate guide to calculate the pot of an occupational pension, multiply the annual pension by 20. Once commuted, make sure any other pension plans you wish to commute are completed within the 12 month period.

In our experience the vast majority of people will overpay tax when they commute their pension and will need to complete a form P53 to claim it back. Contact HMRC on 0845 300 0627 and ask. You will receive one form immediately and another at the end of the tax year.

TaxHelp for Older People: Keep on checking…

This guest post is by TaxHelp for Older People (TOP), a charity offering free tax advice to older people on incomes below £17,000 a year. The Helpline number is 0845 601 3321. 

Last month we discussed the 2011/12 tax rates and allowances and we promised some more examples.

People often call our charity because a friend has told them that they shouldn’t be paying that much tax, our incomes are the same so it must be wrong. Our experience shows that you have to check very carefully because your age, marital status, eyesight and type of income can make a huge difference to the final tax to be paid to HMRC and in the way that it is collected.

The following examples using the proposed 2012/13 rates will give a taste of the issues that can affect your tax.

1. A person, 66 years old, who only has their state pension of £13,500 per annum has a personal allowance, PA (tax-free amount) of £10,500 leaving £3,000 to pay tax on at 20% – £600. Sound easy until you consider that they do not have any way of paying it because the state pension cannot be taxed at source under Pay As You Earn (PAYE). This person has to complete a self assessment each year and pay the tax in a lump sum by the 31st January after the end of the tax year.

2. Whereas another person, also 66 years old, who has the same income consisting of state pension £5,300 and company pension £8,200 will owe the same amount of tax but it can be paid under PAYE. This is done by removing their state pension from their PA. £10,500 less £5,300 leaves £5,200 tax-free allowance. Knocking off the final digit and adding a letter creates a code 520P which is sent to the pension provider who will remove £5,200 from the pension income before calculating the tax to be paid.

3. If the person above has a state pension of £12,050 and 3 small pensions instead, say    a) £500, b) £550 and c) £ 400 then the code of 520P will need to be split as no pension is large enough to pay the £600 tax. Pension providers are only allowed to take 50% of a pension which adds to the fun.

4. If we then consider the same income as example 2 but the person is 79 years old registered blind and married, it becomes more complicated. This time the PA will be £10,660 (75 and over) plus the married couple’s allowance of £3,853 restricted to 10% of its face value, giving  tax-free income of £14,513. This makes the person a non-taxpayer. But… the married couple’s allowance hasn’t been fully used and the blind person’s allowance has not been used at all. Both of these allowances can be transferred to the spouse, so it is important to check if this is possible.

You will be realising by now that tax really can be quite taxing. If you are unsure of anything it is worth asking someone who does understand and is able to explain it all clearly. TaxHelp for Older People (TOP) is a charity offering free tax advice to older people on incomes below £17,000 a year. The Helpline number is 0845 601 3321.

Image: Matt Aeillo

TaxHelp for Older People: A new season begins

This guest post is by TaxHelp for Older People (TOP), a charity offering free tax advice to older people on incomes below £17,000 a year. The Helpline number is 0845 601 3321. 

Photo - Darren Shaw

It’s coding time again, how fast the years fly by! It’s the time when you will be expected to read, understand and inform HMRC if they have got your tax codes wrong. This year HMRC tell us that their new computer system is now running at 98% accuracy. This is brilliant news and means that for most of us our tax affairs will be in order.

But hold this thought in mind… There are approximately 35 million people paying their tax under the Pay As You Earn method (PAYE) and another 5 million paying by both PAYE and Self Assessment. If you do the maths you will see that 800,000 people will still have problems.

You got it… You still need to check your coding notices and statements carefully, especially if you have multiple sources of income, have recently retired, been bereaved or had any change in circumstance.

Here are the 2012/2013 rates, allowances and reliefs (subject to the budget):

• Basic rate band (you will pay tax at 20%)                        £0 to £34,370
• Higher rate band (you will pay tax at 40%)                       £34,371 to £150,000
• Additional rate band (you will pay tax at 50%)                  Over £150,000

Personal allowances

• Age under 65                             £8,105
• Age 65 to 74                              £10,500   (Can be claimed at the start of the tax year if income for the year is less than £25,400)
• Age 75 and over                        £10,660   (As above)
• Married couples’ allowance      £7,705
• Blind person’s allowance          £2,100

The married couples’ allowance is only available if one of you was born before 6^th April 1935, it is restricted to 10% so you would expect to see half of this figure in your tax code (£3,853). You are able to share this allowance with your spouse and if you have done this check your coding notices very carefully.

You do not have to be totally blind to claim the blind person’s allowance but need to be registered with your local authority on the blind register (in England and Wales only). If you think you may qualify, ask your doctor to refer you to an eye specialist. This allowance can also be shared with your spouse; if your own income is low it may be beneficial to do this.

All you have to do now is match this lot to your own situation. For example:

Mrs A is 63 and still working, has deferred her state pension and doesn’t have any other income. She will have a personal allowance of £8,105 before she pays any tax. Her code will be 810L which will be sent to her employer.

Mrs B – also 63 – receives her state pension of £7,105, has a work’s pension and a part-time job. She has the same personal allowance of £8,105 but her state pension is taxable and can’t be taxed at source, so it needs to be subtracted from her allowance. So £8,105 minus £7,105 leaves £1,000. This will be sent to her pension as it is a continuing source as code 100L, as all of her allowance is used up any other income is taxed at basic rate (BR) 20%. Care has to be taken to make sure that income sources are large enough to operate the code.

Don’t fret. We will continue with more examples next month!