3m pensioners: reclaim £1k in tax before you lose it
Filed under: Pensions
The expects say it's essential to do so - before the break goes - as you could get your hands on £1,000.
Penions Tools & Tips
Retirement Tips & Tools
Need to know: Savings
The proposalThe proposal, which we reported last week, is that the 10% tax break on some savings ought to be axed. At the moment if your 'non-savings income' is low, then the first £2,710 of interest on your savings is taxed at 10%.
For those of working age the limit on earnings is £10,815, for those aged 65-74 it may apply to those with pensions income under £13,210, and for those over the age of 65 the limit is £13,370. In practice this tends to mean that the vast majority of people who qualify for the tax break are pensioners.
However, in order to get the tax break you have to apply for it.
Missing outIn making the proposal, the OTS said that one of the reasons why the tax break should be axed was that so few people take it up. It said: "We recommend that the 10 per cent savings rate is removed, as awareness and claim levels are so low that it is ineffective in incentivising savings."
Save our Savers, which campaigns for a fairer deal for Britain's savers, submitted a Freedom of Information request to HMRC last summer and discovered that in the 2009/10 tax year, 3.5 million people would have been liable at the 10% tax rate, but that only 550,000 made a reclaim through self-assessment. There are no figures on how many did it by completing an R40 form, but it means that up to 3 million could be missing out.
Jason Riddle, a founder of Save our Savers, wrote in his blog: "The system is inequitable and the tax unfair. The way in which lower rates – designed to help those on low incomes – operate is poorly understood, bureaucratic and ineffective."
The Low Income Tax Reform Group Chairman, Anthony Thomas, calls it a "highly complex tax system." He added: "Pensioners are also amongst a significant number of low-income savers who pay the wrong tax by misunderstanding the process for getting their interest paid without tax taken off. "
How to claimTypically they are missing out on £90 a year, but the maximum they could be due is £271 a year. This can be backdated for four years, so they could stand to gain £1,084.
This is clearly money we could all make use of in the current climate, and with the threat of the possible withdrawal of this tax relief hanging over us, it's essential that we act fast and reclaim this money while we still can.
The process isn't always simple. If you earn less than the personal allowance it's straightforward because you just need to complete an R85 form, and you will no longer have 20% deducted from your interest.
However, if you earn more than the personal allowance and less than the limits outlined above, then you need to complete an R40 form, which means you'll have half of the tax paid back.
Of course in the long run, if the OTS gets its way, this incentive will disappear and those on low incomes will be back to paying 20% tax on all their savings. The OTS has also recommended increasing the ISA allowance, so that more of this can be tax-free However, it remains to be seen whether the government will accept this part of the proposal, or whether they will cash in on the opportunity to save more money at the expense of pensioners.
What do you think? Let us know in the comments.