Information & advice

The four national Age Concerns in the UK have joined together with Help the Aged to form new national charities dedicated to improving the lives of older people.

We all want to make our money go as far as possible and not paying any more tax than we have to can help. This guide can help you identify how much tax you should be paying. The main part of this guide covers Income Tax but there are also sections on Inheritance Tax and Capital Gains Tax. All figures in this guide refer to the tax year from 6 April 2009 to 5 April 2010.

Age Concern and Help the Aged cannot give individual legal or financial advice. This guide describes the situation in the UK. Some rules may have changed since the publication of this guide. If you have any queries which this guide does not answer‚ seek further advice from one of the organisations suggested.
 

Index

• Taxable income
• Should I be paying tax?
• Blind Person’s Allowance
• Married Couple’s Allowance
• Is my tax code correct?
• State retirement pension and tax
• Savings and investments
• How to pay: Pay As You Earn
• Do I need to complete a tax return?
• Inheritance Tax
• Capital Gains Tax
• Rates and allowances (2009/10)
• Useful organisations
• What should I do now?
   

Taxable income

Not all income counts towards Income Tax. The tax rules are not necessarily the same as those for benefits or local council services. You may have to pay tax on:

• earned income from employment or self-employment
• pensions‚ including state pension‚ and annuities (except war pensions)
• interest from savings accounts
• dividends from investments
• income from lettings.
  

You do not have to pay tax on:

• Pension Credit
• lottery or Premium Bonds wins (or any other gambling wins)
• Winter Fuel Payments
• Attendance Allowance/Disability Living Allowance
• war pensions
• industrial disability
• Individual Savings Accounts (ISAs)
• some National Savings and Investments products.

Contact HMRC or TOP for further information about which types of income are taxable and which are non-taxable.

Capital does not attract tax itself‚ only the interest or income it generates. If you win £100‚000 on the lottery and keep it under the mattress‚ it is of no concern of the taxman. If you put it in a savings account and start to get 3% interest‚ then that interest will be taxable. The lump sum will affect entitlement to benefits such as Council Tax Benefit.

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Should I be paying tax?

Everyone has a personal tax-free allowance. If your total taxable income is greater than your personal allowance (PA)‚ you will have to pay some tax. If not‚ you are a non-taxpayer.

Your PA depends partly on your age. In 2009/10 the levels for PA are:

• ages 0–64: £6‚475
• ages 65–74: £9‚490
• age 75 and over: £9‚640.

The higher allowances take effect from the beginning of the tax year in which your 65th or 75th birthday falls‚ not from the date of your birthday‚ even if your birthday falls towards the end of the tax year.

Even if you are 65 or older‚ the age-related part of your PA is reduced if your income is higher than a certain amount‚ set at £22‚900 in 2009/10. It is cut by £1 for every £2 of income above that figure. For example‚ if your income were £23‚900‚ £1000 over the limit‚ you would lose £500 worth of your age allowance. At age 65‚ you would only get £8‚990‚ not £9‚490. However‚ even if you have a very high income‚ your PA cannot be reduced below the basic allowance of £6‚475.

Two other major allowances can affect your tax bill: the Blind Person’s Allowance and the Married Couple’s Allowance.

If your taxable income falls below your PA‚ check your payslips and so on‚ to make sure that no one is deducting any tax from anywhere‚ and read the section in this guide on savings and investments.

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Blind Person’s Allowance

The Blind Person’s Allowance (BPA) increases your tax-free allowance by £1‚890.

In England and Wales you have to be registered as a blind person with the local authority (or have made an application) to qualify for the BPA. Contact your local authority for details of the registration procedure. You do not have to be totally without sight to meet the criteria for registration‚ but you do need to show that your lack of sight makes it impossible for you to perform any work for which sight is essential.

Partially sighted people do not qualify for BPA but loss of sight is often progressive. Once your eyesight has started to deteriorate‚ have it tested regularly in case it does become bad enough to claim the allowance.

Once the registration process is complete‚ phone the HMRC helpline‚ 0845 366 7887‚ and ask for the BPA – it is not added automatically. As many as 100‚000 registered blind people may not have claimed the BPA. If you qualify‚ make sure you take up this allowance.

If your income is too low to benefit from the BPA‚ you can transfer it to your spouse or civil partner regardless of the state of their eyesight. This can be very valuable if they have a higher income than you‚ as you can ensure that the allowance is not wasted.

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Married Couple’s Allowance

You can only claim the Married Couple’s Allowance (MCA) if you are a married couple or civil partners‚ and where one of you was born before 6 April 1935. If this does not apply to you‚ skip this section.

MCA does not increase your tax-free allowance‚ like the personal allowance and the Blind Person’s Allowance‚ but is deducted from your tax bill. It is only worth 10% of its face value – your bill is reduced by 10% of the amount of the MCA. In 2009/10‚ the MCA is given at £6‚965‚ which in practice means that up to £696 is taken off your tax bill.

For couples who got married before December 2005‚ the MCA is given to the husband in the first instance. For couples who qualified after that date‚ the MCA is given to the higher earner‚ whoever that is. The other spouse/partner has the right to ask for some of the allowance to be apportioned to them.

If the first person’s total tax bill is less than the full amount of the MCA‚ any remaining allowance can be transferred to the other person to reduce their tax bill‚ if he or she is a taxpayer.

There may be other ways in which couples can try to make their financial arrangements more tax efficient‚ for example‚ by putting savings into one person’s name to take advantage of any unused tax-free capacity.

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Is my tax code correct?

Tax codes are the way HMRC tells your employer or pension provider how much tax to deduct before paying you under the Pay As You Earn (PAYE) system. Coding can be complicated and is the biggest single cause of tax problems.

You should receive a separate coding notice for each private pension you have and for most jobs but not for the State Retirement Pension (SRP). The notice explains how the code has been worked out. It is your responsibility to check it and call the office number on the tax notice if you think it is wrong. Ask if you do not receive a notice for any of your income sources.

Tax codes are usually made up of a number and a letter. In most cases the letter is less important in understanding your tax than the number but there is one exception that particularly affects people receiving SRP – the K code.

For example‚ aged 67 you have personal allowance (PA) of £9‚490 and your SRP is £6‚000 a year. Take that away from your PA and you still have £3‚490 of your tax-free allowance left. If you have a work pension of £5‚000‚ the first £3‚490 will not be taxed and then the pension payroll will deduct tax on the remainder. The pension payroll should have received a code of 349P to tell them what to do. The number in the code represents the available tax-free allowance‚ with the last digit removed.

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State retirement pension and tax

State Retirement Pension is taxable income‚ but is paid without any tax being deducted. The code that you are allocated for other income will usually treat your SRP as having counted towards your tax-free personal allowance and then pass any remaining allowances on to your other pension or earnings.

If your SRP is greater than your personal allowance‚ there will be some tax due on it. If you have a private or work pension‚ HMRC can instruct the pension provider to collect the outstanding tax due on your state pension along with the tax due on the private or work pension. For example‚ if your SRP is £1‚000 above your personal allowance‚ and you have a personal pension of £3‚000‚ HMRC will instruct the pension provider to deduct tax as if they were paying you £4‚000.

This is done by assigning a code in which the letter K is followed by a number (eg K99). Where ordinary codes say what amount of tax-free income is left‚ K codes indicate that you should be treated as having more taxable income than that provider is actually paying you. The higher the number in the code‚ the more taxable income you will be treated as having. If you are assigned a K code‚ it is worth getting it checked.

If your SRP is greater than your personal allowance but you do not have any other income‚ read the section on Self Assessment.

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Savings and investments

Savings include money held in accounts with banks and building societies and fixed-term bonds that produce income. The interest on these (or income from bonds) is taxable and that tax is usually deducted at source by the bank or other financial institution at a flat rate of 20%. Higher rate taxpayers have to pay further 20% later on.

If you are not a taxpayer‚ then you can sign a form called R85 so that the interest can be paid without deduction of tax. You get this form from the bank or building society and complete one for each account that you hold. If you have a joint account and only one of you is a non-taxpayer‚ that person can still sign the R85 and receive their share of the interest without tax taken off.

To decide if you are eligible for gross interest‚ you must add up all your taxable income. Add up the gross income before tax‚ not the net income you have received after tax. If you are unsure‚ seek further advice.

If your circumstances change and you become a taxpayer again you must cancel your R85s. This may happen when a spouse or partner dies and the survivor inherits their pensions; if you release equity from your house and invest the money; or even when interest rates change.

Even if you are a taxpayer you may be eligible to pay a reduced rate of tax on your savings. In 2009/10 up to £2‚440 of savings interest can be taxed at 10% instead of 20%‚ but only if your income is less than your total allowances plus £2‚440. Tax is still deducted at 20% and you have to reclaim the excess. If your income is no more than two or three thousand above your PA‚ ask for further information.

Different rules apply to shares or unit trusts that pay dividends. A dividend is basically a share of the profits distributed among the shareholders. Once or twice a year you will receive a notice of the dividends paid saying that a tax credit has been accounted for. In effect‚ you have paid 10% tax on the dividend and have no further tax to pay (unless you are a higher rate taxpayer). Non-taxpayers cannot reclaim this tax credit.You should include the total dividend in your taxable income when you are doing your calculations to see if you are a taxpayer. Keep the voucher with your tax papers in case you need to complete any forms for HMRC.

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Constance retired from nursing aged sixty......

'I had never paid much attention to my tax.  I filled in a form when I retired to say what my income would be and assumed that the right amount was being deducted from my NHS pension.  I was sent a second form to fill in so thought that the first had probably been lost.

When I reached 65 I completed another form to see if I qualified for a higher allowance because of my age.  Shortly afterwards I got a letter saying that I owed £6‚000 in back taxes because my state pension hadn't been taxed.  I was shocked and very worried - I don't have that kind of money to spare.

I asked my local Age Concern what I should do and they suggested that I contact TaxHelp for Older People.  I did and they arranged for me to see one of their professional advisers.  When I explained the situation he thought that the tax office had made a mistake.  He helped me to challenge them so that they admitted that the demand had been their error and withdrew their demand.  He also checked that I had the right tax code for the future.

I find tax complicated to understand but if I have any problems in the future I will make sure I get expert advice again'.

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How to pay: Pay As You Earn

Pay As You Earn – PAYE – is the system for paying tax as you earn the income‚ using tax codes.

Your tax code is allocated on the basis that you will be earning steadily throughout the tax year. Depending on how often you are paid‚ 1/12 of the annual tax is collected each month‚ or 1/52 of the tax each week.

If your circumstances change during the year‚ the assumptions on which your tax has been calculated to that point will no longer apply and it will have to be adjusted. Any increase or reduction in your income may affect your liability for tax‚ for example‚ on retirement. You may be able to claim tax back or may have more to pay and you will have to go into Self-Assessment and complete a tax return to settle the remaining tax due.

A common problem with PAYE occurs if you only have another small pension besides your state pension (SRP)‚ but tax is due on your SRP. No more than 50% of one income source can be taken in tax. If the tax due on your SRP and other pension come to more than 50% of the other pension‚ you will have to use Self-Assessment and complete a tax return to settle the tax due in full.

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Do I need to complete a tax return?

If you have income that is difficult or impossible to tax under PAYE‚ you may have to complete a tax return. This is called Self-Assessment. Your taxable income for the year and the tax you have paid so far are added up and HMRC calculates whether you owe more tax or are due a refund. Reasons why you might have to complete a tax return include:

• self-employed work
• a foreign pension
• letting out a property
• untaxed interest from a Pensioners Guaranteed Income Bond
• you are a higher rate taxpayer
• you have only a State Retirement Pension but it is higher than your personal allowances.

Tax returns are usually sent out in April or May for the preceding financial year.

You should request a form if you are aware of any untaxed income to be declared. You can complete a short form if your affairs are simple. If you have to do a full return‚ do not panic – not all the form will apply to you.

Your return needs to be in by 31 October‚ although the tax is not due until 31 January. If you need help ask in good time‚ three or four months before the deadline. If you miss the deadline‚ you can still complete your return online until 31 January.  This means you must have access to (and the ability to use) the internet via a computer.  If you would like or have to use this method‚ ask TOP or your local Age Concern for guidance.

You can make the process easier by keeping good records and putting money aside throughout the year so that you do not have to find a lump sum just after Christmas.

'I have three small work pensions and get a coding notice for each. I don't understand the jargon but wanted to check that they were correct.  Age Concern put me in touch with TaxHelp for Older People‚ who checked them for me.  They found a small mistake and phoned the Revenue to ask them to correct it.  This has saved me a pound a week and I feel safer knowing that there shouldn't be any nasty surprises in store later on'.

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Inheritance Tax

Inheritance Tax (IHT) may be payable on a person’s estate after they die. The first £325‚000 of an estate is exempt from IHT. This is called the nil rate band because tax is charged at 0%. Thereafter tax is charged at 40%.

Since 9 October 2007‚ where a spouse or civil partner dies‚ any unused part of that person’s nil rate band can be passed on to the survivor. When the second person dies‚ their estate could benefit by up to double the nil rate band in force at the time.

Bequests between spouses and partners are exempt from IHT. If a husband dies and leaves everything to his wife‚ the whole of his nil rate band will be available to his wife’s estate when she dies. For example‚ Arthur dies in May 2009 and leaves everything to Enid. She dies in November 2009‚ so his £325‚000 nil rate band is added to hers‚ meaning her estate has a £650‚000 nil rate. If Enid does not die in the current financial year‚ the amount added for Arthur’s nil rate band will be the full nil rate band for the year when she dies‚ not the current figure.

Not all bequests are exempt from IHT. If Arthur left money to his children this would have been counted towards his nil rate band and reduced the proportion available to carry over to Enid’s estate.

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Capital Gains Tax

A capital gain is the increase in the value of an asset between your buying or acquiring it and selling or disposing of it. You have an annual tax-exempt amount for capital gains‚ £10‚100 in 2009/10‚ but if your total capital gains are greater than this‚ you may have to pay Capital Gains Tax (CGT) and should take professional advice. If they are lower‚ you have no need to worry.

CGT does not just apply to assets that you buy. It includes gifts and legacies as well. In these circumstances any gain is calculated based on the market value of the asset at the time it came into your ownership. If you inherit a house from a relative‚ its value is that at the date of your relative’s death‚ and any gain will be the difference between that value and the price for which you later sell it.

The most important exception for most people is that no CGT is payable on the sale of your main home. This does not apply to second homes or properties that you let out. If there are gaps in your periods of residence in your main home‚ for example‚ when working abroad‚ special rules apply and you will need professional advice.

A common question about CGT concerns the sale of a house when putting an elderly parent into residential care. If that was their main dwelling‚ then it is exempt from CGT on sale. If the proceeds are then invested to pay for the care‚ any interest or income will be subject to Income Tax rules‚ but that is a different matter.

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Rates and allowances 2009/10

Personal allowances

• Person under 65 £6475
• 65–74 £9490
• 75 and over £9640

Note

The higher age allowance is available for whole of the year in which the 65th birthday falls.

• Blind Person’s Allowance £1890
• Married Couple’s Allowance £6965
  

Note

Married Couple’s Allowance (MCA) is only worth 10% of face value and reduces tax due. It does not increase tax-free income.

• Income threshold before age allowances reduces £22‚900

• Age allowances are reduced £1 for every £2 of income above threshold until reduced to the basic personal allowance of £6475. Thereafter MCA reduces in the same way to a minimum of £2670.

Rates and bands

• First £37‚400 of taxable income 20%
• Thereafter 40%

But

• First £2‚440 of savings interest (if other income at or below personal allowances) 10%
• Otherwise standard savings rate 20%

Note

• Higher rate taxpayers have a further 20% to pay
• Dividends tax credit 10%.

Note

• Higher rate taxpayers have a further 22.5% to pay.
• Capital Gains Tax (CGT) (above annual exemption of £10‚100) 18%
• Inheritance tax (IHT) (above nil rate band of £325‚000) 40%

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Useful organisations

Age Concern

Find details of your nearest local Age Concern on our site‚ or call the Age Concern Information Line on (free call) 0800 00 99 66.

Age Concern Northern Ireland
Tel: 028 9032 5055 (national call rate)

Scottish Helpline for Older People (Age Concern Scotland)
Tel: 0845 125 9732 (lo-call rate)

Age Concern Cymru
Tel: 029 2043 1555 (national call rate)

Help the Aged
Help the Aged produces a range of free advice leaflets and information sheets for older people.  These are available from the Information Resources Team or can be downloaded from the website.
Tel: 020 7278 1114

Chartered Institute of Taxation (CIOT)
The CIOT website contains an area for people looking for general tax information‚ seeking to employ a professional tax adviser or seeking access to free advice if they cannot afford to employ a tax adviser.
Tel: 020 7340 0550 (national call rate)

Department for Work and Pensions (DWP)
The DWP is responsible for a range of benefits and services for pensioners and people planning pensions.

 
HM Revenue and Customs (HMRC)
For information about taxes‚ including Income Tax and Inheritance Tax. Contact your nearest HMRC enquiry centre‚ details should be in phone book.


Low Incomes Tax Reform Group (LITRG)
The LITRG website contains a wealth of information on matters concerning all people on low incomes and guidance on taxation as it affects them.

Pensions Advisory Service‚ The (TPAS)
TPAS is an independent voluntary organisation that is grant-aided by the Department for Work and Pensions to provide information and guidance to the public on state‚ company‚ personal and stakeholder pensions.
Helpline: 0845 601 2923 (lo-call rate)


Pension Service‚ The
For details of state pensions‚ including forecasts and how to claim your pension.
Tel: 0845 60 60 265 (lo-call rate)
Textphone: 0845 60 60 285 


TaxHelp for Older People (TOP)

TOP is a national charity founded in 2001 to provide free professional help on personal tax to older people on low incomes who would not otherwise be able to afford to pay for such advice. Appointments are offered at tax surgeries held by tax advisers in Age Concerns and similar venues across the country. Home visits are also available for those who need them for reasons of disability or other difficulties.
Tel: 0845 601 3321 (lo-call rate)


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What should I do now?

If you would like more information on the issues in this guide‚ please call the Age Concern Information Line free on 0800 00 99 66.

The following Age Concern Information guides may also be useful:

• Be money smart (ACIG32)
• Making the most of your money (ACIG09)

You can order free paper copies of all our information guides from our online Information Guide order form. 

Related books

We also publish books covering many of the above issues in our online bookshop. The following book may be of particular interest:

• Pay less tax 2009/10 by Paul Lewis. Clear‚ simple steps to check that you are paying the amount of tax at the right time and‚ if you have been paying too much‚ how to go about claiming tax back.
• Write your will by Susie Munro. Do you have a will? Half of people aged over 45 don’t and without one there’s no guarantee your loved ones will get everything intended – or receive anything at all. Is that a risk you want to take?
  

Ordering is easy

To order any of our books or request our free catalogue simply choose one of the following options:

• call us on 0870 44 22 120
• visit our website at www.ageconcern.org.uk/bookshop

 

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Freephone
Information Line
0800 00 99 66