Imposing the Pay As You Earn (PAYE) tax collection system on the state pension – an Easter idea floated by the Treasury – could be
a disaster.
Not just
because it would combine the communication and administrative talents of DWP and
HMRC – a toxic mix if every there was one.
But because PAYE
is least able to cope when income changes during the tax year and when there is
more than one source of income.
Which is exactly
what happens at retirement and after.
PAYE is a way
of collecting tax not assessing it. That is why every year millions of tax
codes are wrong, too little or too much tax is deducted, and HM Revenue & Customs has to write to those taxpayers asking
them to send more money or enclosing a refund cheque - or sometimes both.
PAYE works
well when people have a single smooth regular income. That is not the common
experience in retirement.
There is no
longer one retirement age. People move from full time work to part-time, pensions
kick in at different ages, and the state pension arrives at a date that is set
to rise to 68 or beyond.
As
retirement takes hold some taxpayers move to incomes too low to pay tax. Others
who have not worked for some time will find the state pension is their first taxable
source of income for years. Many will acquire a second, third or fourth source
of income as pensions kick in and perhaps part-time work is started.
All those
changes may happen over several tax years. And they are exactly the conditions
which baffle PAYE and lead to under- and over-payments of tax followed by recovery
or repayment, often years later.
It may not
matter too much to someone in a well paid job if they suddenly get a demand for
hundreds of pounds tax. It certainly will matter to someone on an income of
£12,000 a year.
MPs reported
in February 2010 that an estimated 1.5 million older people had overpaid £250 million
of tax on their personal and company pensions and half a million had underpaid £100 million. (1)
Why extend those problems to the state pension as well?
