Pensioners forced to declare interest on savings

HMRC is denying plans to start forcing tens of thousands of pensioners to fill in tax returns for the first time - but says they will still have to declare interest on savings.

Under the government's shakeup of pensions, people will have to start declaring interest on their savings if it's more than £1,000 for a basic rate taxpayer or £500 for a higher rate taxpayer. Those who fail to do so will face fines.

And, Patricia Mock, a tax director at Deloitte, tells the Daily Telegraph: "This could particularly hit pensioners, people who are basic rate taxpayers who in the past far haven't needed to file a tax return. There is going to need to be a massive communications exercise."

The new Personal Savings Allowance lets basic rate taxpayers take £1,000 in interest tax-free; £500 for higher-rate taxpayers. However, while banks and building societies currently take tax automatically before paying out interest, this is set to change. From next April, interest will be paid in full to savers, who will then be expected to declare the income.

This means that anybody with savings of more than £31,000 at an interest rate of 3% could be required to declare the interest - potentially drawing tens of thousands of pensioners into the system.

A report produced for the government earlier this year by IFF Services found that most taxpayers were unaware of the change.

"Most people expected tax on savings to be deducted 'at source' (many found it difficult to elaborate what they meant by 'at source'), or automatically through banks/building societies," the authors conclude.

"Indeed, few customers were aware of the Tax Deduction Scheme for Interest (TDSI) – often they were surprised and concerned that they did not know about it; and in the case of higher rate tax payers they were generally unaware that they had to notify HMRC and pay additional tax on their savings interest."

HMRC has so far declined to reveal just how the rules will be interpreted in the case of pensioners. But, it says, there is 'no question whatsoever' of forcing them to complete full tax returns. It says it's looking at a range of options to allow income from interest to be reported more simply.

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