Tax on state pensions to be abolished?

Should you pay tax on the basic state pension? Many British pensioners do. It's thought that well over 5.5m pensioners pay tax thanks to interest on savings and private pension arrangements hauling them across the tax threshold.

But a new report to the Treasury is proposing scrapping tax on state pensions - and it could leave many more than £1,000 better off.

Cash boost

The basic full state pension is valued at £5,311. By lopping 20% off it in basic income tax, that has a cash value of £1,060. This sum would make a considerable difference for many, given rising living costs. However, no decision has been made on the issue, but The Office for Tax Simplification recommendations are being drawn up for Ministers to consider.

The Office for Tax Simplification carries some weight given that it is an independent organisation. It claims the current system for taxing pensions remains confusing for some, and is also potentially unjust for many. (It's thought many pensioners are even unaware that their state pension income is taxed.)

"Our report floats a number of possible ways forward to mitigate the difficulties pensioners face," says John Whiting, Tax Director for the Office of Tax Simplification. He adds: "We are aiming to make final recommendations that will mean pensioners can have a better understanding of a simpler tax system, and can deal with their responsibilities more easily."

Five biggest taxpayer stings
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Tax on state pensions to be abolished?

Most recently HM Revenue & Customs let Vodafone off the hook - for quite a sum. Vodafone paid out just £1.25 billion despite an original tax bill being closer to £8 billion (HMRC has always refused to reveal how much it thought the Vodafone final bill was). The episode was made even more shaming and painful because Vodafone was given several years to come good with the cash owed - even though it was sitting on a substantial cash pile at the time.

The Exchequer is estimated to have lost around £10 million to Goldman Sachs recently through an 'error' made by HMRC. The episode relates to an employee benefit trust run by Goldman allowing employees to take non-repayable loans that had no National Insurance contributions tied to them. HMRC did claw back the full amount from more than 20 businesses - but not Goldman. HMRC remains cagey about the details of the deal. Little HMRC accountability or transparency.

Huge problems with QinetiQ, the former Defence Evaluation and Research Agency, or DERA. A lack of clarity on contractual arrangements at the outset didn't help, allowing private equity company Carlyle to hammer the price down (why would you start negotiations when you didn't know the company's true value?). The Ministry of Defence behaved, it was said, like "an innocent at a table of card-sharps". Estimated cost to the taxpayer - £90 million. Huge sums were later made by QinetiQ management when the company listed.

The TaxPayers' Alliances estimates £2.7bn worth of taxpayer cash was wasted with a super-expensive 'National Programme for IT in the NHS'. The Department of Health, in the end, had very little to show for it as a consequence. Another example of poor management and a seemingly ingrained inability to provide taxpayers' with value for money.

"BT is paid £9 million to implement systems at each NHS site, even though the same systems have been purchased for under £2 million by NHS organisations outside the Programme", the Commons Public Accounts Committee noted.

Contentious. The Office for National Statistics estimated this has declined 3.4% since 1997, "with inputs increasing by 38%." The Centre for Economics and Business Research estimate that this inefficiency costs the taxpayer £58.4 billion a year.

Given the above record, are there any deals that the taxpayer has actually won out on? Not many, but the one successful project was the roll out of new Jobcentre Plus offices. It came in £314 million under budget, claims the Taxpayers' Alliance. A small cheer.



The background to the possible changes - more people working longer, perhaps deferring taking pensions (whether state or private) plus compulsory retirement ages disappearing and the introduction of auto-enrolment - is making the UK pensions landscape more complex.

But when one hand gives, another may take away: it's possible that the current higher tax allowance - £9,940, for those between 65 and 74 - may be abandoned as part of potential new changes.

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