Review of pensioner's taxation: Final report
For most people, during their working lifetime, tax payments have effectively been on “autopilot”. They have benefitted from being a part of the “Pay as You Earn” (PAYE) system. This has meant that a combination of HM Revenue & Customs (HMRC) and employers have ensured that on each pay day, an employee has paid broadly the right amount of tax. If a person has been a higher rate taxpayer the benefits of PAYE have still applied.
Where savings and investment income are involved, most basic rate taxpayers find that a simple deduction of tax has been made at source and so no further action is required. For those on higher rates of tax, liabilities in this area are, in the main, sorted out via the annual self assessment return or through coding adjustments.
However, when someone decides to leave the world of work and retire, this relatively straightforward procedure changes. Gone is the simplicity and certainty of the PAYE world. A newly retired person will soon find themselves on their own when it comes to HMRC. A combination of multiple sources of income, ranging from pensions to interest on savings and investment dividends may well be high enough to incur a liability to pay tax. But the answer to the “how much should I pay” question may involve everything from the source of the income, their age, marital status or even their ability to see.