Tax health check for older people

Transcription

1 Tax health check for older people 2015/16

2 Chrissie Maher, founder of Plain English Campaign says, This little gem caught our eye out of all the nominations we received for clear and independently written information. Along with the touch of humour in the writing, this booklet makes the subject of tax a little less painful, and a worthy winner for our Plain English Award. Copyright 2015 Tax Volunteers. Permission granted to reproduce for personal use only. Commercial copying, reproduction or other use is prohibited.

3 TAX HELP FOR OLDER PEOPLE INTRODUCTION Tax Help for Older People (Tax Help) is a charitable service established to provide free professional help with personal tax to older people on modest incomes. From its head office in West Dorset the staff handles calls from all over the UK. They either give advice over the telephone in response to straightforward queries or arrange a face-to-face appointment with a professional tax adviser at a venue convenient to the client or, in cases of mobility, caring or transport difficulties, by a home visit. Our constitution requires us to help those whose income makes it difficult or unrealistic to pay for tax advice and we therefore set guidelines of around 20,000 income as an upper limit to be eligible. We will, however, be flexible where other circumstances e.g. disability or advanced age suggest an easing of this limit. By older people, we mean roughly 60+ but we will still help those in their fifties who have suffered bereavement, redundancy, illhealth, retirement etc. It is often these events which trigger the tax problems which Tax Help encounters in its clients rather than the birth date. The simplest way to contact Tax Help is to phone details inside back cover. You can also write to us or again, details inside back cover. The rest of this booklet is given over to helping you identify areas of tax concern or problems. It may be that after reading the relevant section, you understand better your tax situation or it enables you to contact HMRC directly, armed with the right questions. If you realise that you haven t got a problem or if you overcome your fear, however misplaced, of approaching the Revenue, then we can count these pages a success. If still worried, call Tax Help and stop worrying. TAX HEALTH CHECK 3

4 FOREWORD This guide is not intended to turn you into a DIY tax doctor. The main aim is to enable you to recognise undesirable symptoms and direct you to an appropriate source of help. A secondary aim is to recognise when your tax health is fine and there is no need to worry. In the following pages, we will be looking at some of the common tax issues which affect older people in, we hope, plain English. It is certainly not a comprehensive review of taxation! To avoid having to flip backwards and forwards too much, each chapter deals with one topic only, but obviously there will be a certain amount of cross-referencing and we have tried to indicate that clearly in the text. We hope the list of contents will guide you to the areas which concern you and spare you the chore of reading the totally irrelevant. All figures used in examples refer to those for the tax year starting 6 April 2015 and ending 5 April TAX HEALTH CHECK

5 CONTENTS Income for Tax Purposes 6 Am I a taxpayer? What is taxable? What is not taxable? So am I a Tax Payer? 8 Codes 10 What is a code? Should I have one? How do they work? What do they mean? Savings & Investments 13 What is the difference? Does it matter? How do they affect my tax? Blind Person s Allowance 15 My eyesight s not great but I can see something. Read this chapter. Married Couple s Allowance 16 Neither of us was born before 6 April Skip this chapter. Pay As You Earn 18 Tax is deducted before you receive your pension? This chapter is for you. Self Assessment 20 Tax is not deducted from some income? Probably you re in SA. Problems Paying Your Tax 22 How is my tax collected? If you cannot afford to pay. Inheritance Tax 25 House worth more than 300,000? Read on. If not, skip. Capital Gains Tax 26 Only relevant if you make large profits buying and selling. Paperwork & Forms 27 The most common ones you will meet. Appendix: Rates & Allowances 31 As proposed in the Budget on 19 March. For most everyday taxes. Useful Contacts 33 TAX HEALTH CHECK 5

6 INCOME FOR TAX PURPOSES You need to be clear what chunks of your money are of interest to the taxman. It sounds odd, but this is not necessarily the same as the interests of the benefits people or the local council. If, for example, you win 100,000 on the lottery, the taxman will pay no attention to that lump sum, whereas if you pay a reduced Council Tax your local Council will want to review your payments immediately. So here is a list of the most common sources which HMRC take an interest in: 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 Some benefits 6 TAX HEALTH CHECK

7 And here is a list of some sources which they are not interested in: 7 Pension Credit 7 Lottery or Premium Bonds wins (or any other gambling wins) 7 Winter fuel payments 7 Disability Living Allowance, (now Personal Independence Payment) 7 Attendance Allowance 7 War pensions 7 Industrial Disability 7 ISAs 7 Some National Savings & Investments products Remember, neither of these lists is exhaustive. As always throughout this booklet, if in doubt, contact HMRC or Tax Help for fuller information. Capital in itself does not attract tax. It is only interest or income generated by that capital which is taxable. So if you put that 100,000 win on the lottery in a sock under the mattress, it is still no concern of the taxman. As soon, however, as you put it into a savings account and start to get interest, then that interest will be taxable. TAX HEALTH CHECK 7

8 SO AM I A TAXPAYER? That will depend on whether your taxable income exceeds the personal tax-free allowances which everyone gets from birth. You add together all the sources of income from the first list and see if they are greater or smaller than your personal allowances (PA). If smaller, then you are a non-taxpayer; if greater, then you will have some tax to pay. The first step, therefore, is to know what your personal allowances are. This depends partly on your age. Born after 5 th April 1938 you have the basic PA of 10,600 Born before 6 th April 1938 you have 10,660 For those born before 6th April 1938 with incomes between 27,700 & 27,820 the PA will be reduced gradually down to 10,600. There are two other major allowances which can affect your tax bill, and one new smaller one. One is the Blind Person s Allowance (BPA) which is worth 2,290, so someone aged 61 who is registered blind would have tax-free allowances against income of 10, ,290 = 12,890. See page 15 for full details on this allowance. The second one is the Married Couple s Allowance (MCA). This one is a bit more complicated and will be explained in detail on page 16. The MCA is not an allowance against income like the ones above, but is rather a reducer of any tax due. The MCA is only available to married couples or civil partners where one of the two, doesn t matter which, was born before 6 April If 8 TAX HEALTH CHECK

9 that doesn t apply to you, skip that chapter - it won t affect you at all. New Marriage Allowance (MA) Not to be confused with the Married Couple s Allowance above! If you are entitled to the MCA, you cannot claim this one as well. The Marriage Allowance can be claimed by a married couple or civil partnership where both partners are no more than basic rate taxpayers. The lower earner can transfer a fixed amount of 1,060 of allowance to the other. Doing so can only reduce the recipient s liability to nil, it cannot create a refund. e.g. Melinda only earns 6,000 a year working part-time, so has 4,600 of unused PA. She can therefore transfer 1,060 to her husband Gunther so long as his income does not exceed 42,465. The rules are new and it is still to be clarified how it will work where unused allowances are below 1,060. You can register your interest at If your taxable income falls below your PA, then you should: 1) check your payslips etc. to make sure that no one is deducting any tax from anywhere; and, 2) read the chapter Saving & Investments on page 13 If your income appears to be above your PA, then you should turn to page 10 on Codes. I must thank you for the way my cry for help was answered. It was efficient, friendly, confidence building and took a great load off my shoulders. TAX HEALTH CHECK 9

10 CODES So you are a taxpayer. The following is going to be a very brief outline of what codes are for, and if you have any doubts at all about your codes, then you should contact HMRC or Tax Help. Codes are complicated beasts and are the largest single cause of tax problems. A code is the method by which HMRC transmit to an employer or pension provider the information as to how much, if any, tax-free payment to make before starting to deduct tax. You, the taxpayer, will, or rather, should receive a coding notice explaining how this instruction has been worked out and you, the taxpayer, are expected to study it and contact HMRC if you think it is wrong. If you are in receipt of a state pension (SRP), the code will normally account for the tax due on that yes, it is taxable, although paid without deduction of tax and then, if there are any spare allowances left over, pass them on to any other pension or earnings. We ll show you just one example to give you the idea. PA at 67 10,600 Less SRP 6,000 Tax free remaining 4,600 That s 4,600 of tax-free income you can have before any tax is deducted. So if you have a works pension of 5,600, the first 4,600 will not be taxed and then the pension payroll will deduct tax on the remaining 1,000 at the rates in force, which this year is 20%. So you should pay 200 tax a year on that works pension, or a month. The pension payroll should have received a code of 460L to tell them what to do. How did we get 460? Simply by knocking the last digit off the spare allowances, 10 TAX HEALTH CHECK

11 so 4,600 becomes 460. Those mysterious figures you see in the tax code box on your payslips are in fact just 10% of the amount given and the payroll reconstitute them, so to speak. Most codes have a letter added to them, as above where there is an L on the end. We do not intend to explain them because they are not very useful to you; what matter are the figures of the code. There is only one letter which we must discuss because it affects a lot of pensioners. This is the K code. This is best explained by example. SRP 11,600, PA 10,600. Problem, your state pension is 1,000 greater than your allowances and must be taxed. How to collect the tax on that 1,000? Answer, by adding it on to some other pension you receive. Perhaps you have a personal pension of 3,000 a year. The taxman tells that pension provider to include the extra 1,000 with the actual pension they are paying and deduct tax accordingly. So the pension provider notionally adds the 1,000 onto the 3,000 and deducts tax as if they were in fact paying you 4,000. HMRC, therefore, get their tax through that other source. The code which transmits this instruction is the K code, which is, as you can see, a negative code. Ordinary codes tell the payroll to give more tax-free income; K codes tell the payroll to collect more tax. So the higher the K code, the worse for you because you are paying even more tax. The code here would be K99 we drop the last digit of the 1,000 as above, but then take away 1, don t worry why. Notice the K goes in front of the figures. It is worth getting a K code checked because they seem to create more problems for HMRC than other codes and the concept can be hard to grasp. TAX HEALTH CHECK 11

12 Some of you are going to say that you haven t got another pension which can be taxed or, if you have, it s only a little one. In that case, you must turn to page 20 on Self Assessment. One final word on coding notices. You should receive one for each and every PAYE source of income that you get apart from the state pension. Without a notice you cannot check how HMRC are taxing you and whether they have got it right. So if you haven t received one or any then ask HMRC for one. You are entitled to it. HMRC expect you to check it and get in touch with them if you think anything is wrong. You must point out to them that you can t check it if they don t send you one. I truly appreciate all your expertise, very hard work and commitment which achieved an amazingly positive outcome for me and my family. 12 TAX HEALTH CHECK

13 SAVINGS & INVESTMENTS We ve headed this chapter Savings & Investments because although you may regard them as similar and a general term for your capital as opposed to your income, they are treated differently by the taxman. So, savings first. Many of you have money in accounts with building societies or banks. These produce interest which is taxable and that tax is currently a flat rate of 20% deducted at source by the bank, almost regardless of your personal circumstances. (If you are a higher rate taxpayer, you will have a further 20% to pay, but this booklet is not aimed at those who pay tax at 40%). We said almost, because if you are not a taxpayer, then you can sign a form called R85 so that the interest can be paid gross (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 one can still sign the R85 and receive their share of the interest gross (although some banks are a bit awkward and don t allow this). The R85 rules changed in April So read the paragraph below on the new 0% rate carefully. By savings accounts we mean also fixed-term bonds which produce income. These get taxed in the same way as ordinary easy-access accounts with the tax being deducted at the time the interest is paid. You can register for gross interest by signing the R85 (except for National Savings & Investments products.) To decide if you are a non-tax payer and therefore eligible for gross interest, you must add up your taxable income (see page 6). Don t forget that you are adding up the gross income from all sources, not the net income which has gone into your bank account after tax. Again, if in doubt, ask Tax Help. The other important thing is to remember to cancel your R85s if you become a taxpayer again. Unfortunately, this does happen, frequently on death when a widow inherits her husband s pensions, but it can also happen when interest rates change or you downsize the house and put the surplus into your savings and such like. TAX HEALTH CHECK 13

14 With effect from 6 April 2015 a new 0% rate is available for a band of savings interest of 5,000 above the personal allowance, i.e. a ceiling of 15,600 of taxable income. The R85 process will therefore be extended to those who might benefit from the 0% rate. e.g. someone with an income of 14,600 and savings interest of 500 would be entitled to the 0% rate because his total taxable income would only be 15,100 and so could register an R85. If, however, his income were 15,400 and savings interest of 500, his total taxable income would be 15,900 and thus over the ceiling. He would therefore have to revoke his R85, suffer the 20% tax on his savings interest but, because the first 200 would fall within the 0% band, he could reclaim the 20% tax deducted at source on that chunk of his interest. If you have not previously registered to receive interest gross but think that you may have overpaid tax, you can apply for a refund using form R40 (obtainable from HMRC), claiming up to four previous years. Investments as far as this booklet is concerned refer to shares or unit trusts which pay dividends. These are basically a share of the profits distributed among the shareholders. Once or twice a year you will receive a notice of the dividends paid and saying that a tax credit has been accounted for. We will keep this simple and say that in effect you have parted with 10% tax on the dividend and have no further tax to pay (except for higher rate taxpayers). The drawback is that if you are a non-taxpayer, you cannot reclaim this tax credit. You should do two things. One, include the total dividend including the tax credit in your taxable income when you are doing your calculations to see if you are a taxpayer, and secondly, keep the voucher with your tax papers in case you need to complete any forms for the HMRC. Special rules apply to financial products generally called investment bonds. These are insurance-based products and are taxed at source as if at basic rate. This tax deduction is also non-reclaimable. If you receive letters with ominous- sounding jargon about chargeable gains, call Tax Help for clarification (but don t panic it rarely has any practical significance for the average investor). 14 TAX HEALTH CHECK

15 THE BLIND PERSON S ALLOWANCE According to the Royal National Institute for the Blind (RNIB) there are about 360,000 registered blind people in the UK. According to HMRC about 30,000 people claim the Blind Person s Allowance (BPA). So you don t need to be a mathematical genius to realise that an awful lot of people aren t claiming the allowance. Why not? After all, it s worth 2,290 of tax-free income a year. At basic rate, that s another 8.80 a week in your pocket. One problem is the definition of blind. You do not have to be totally without sight to be registered blind. For tax purposes, there are certain definitions of disability which entitle the visually impaired to the BPA. These can be tested by a consultant ophthalmologist to see if you meet them. There can be a fine line between being partiallysighted and being severely sight impaired (SSI). To be registered blind you have to satisfy the latter. If you suffer from, say, macular degeneration, there is a strong possibility that your sight will gradually degrade into the realm of blindness, but that you won t necessarily notice the imperceptible change. So if only for this reason you should have regular checks once your eyesight has deteriorated. If the consultant certifies you as SSI meaning you are eligible for blind registration in England and Wales you and the local authority (LA) will each receive a copy of a certification form; the LA will then contact you regarding blind registration. In Scotland and Northern Ireland the certification form is only sent to the LA but again, they will make contact. You then phone your tax office and ask for the BPA. It won t happen automatically - you must tell the Revenue. Another important point about the BPA is that it can be transferred to your spouse or civil partner regardless of the state of their eyesight. This can obviously be very valuable if the registered blind person has a reduced income or pension because of their disability. By transferring the allowance to the higher-earning partner, it will not be wasted. Tax Help can help you with this process. TAX HEALTH CHECK 15

16 THE MARRIED COUPLE S ALLOWANCE This one is a bit more complicated. To start with, it is now only available to married couples or civil partners where one of the two doesn t matter which was born before 6 April So if you were both born after that date, skip this chapter. Secondly it is not an allowance against income like the personal allowance and the Blind Person s Allowance, but is actually an allowance or reducer against the tax you owe. Thirdly although the figures look impressive 8,355 it is only given at 10% of its face value. So it only knocks 835 off your tax bill (mind you, that s not to be sneezed at). Again, an example probably best illustrates how it works. Arthur has total pensions income of 13,500 a year. He was born in 1934, so is entitled to MCA. We work out his tax liability. Income 13,500 Less PA 10,660 Taxable income 2,840 Tax due on 20% = 568 BUT his MCA of 835 wipes that out. In fact there is overkill of 267 but unfortunately he cannot ask for that back. What he can do though is transfer the surplus of his MCA to his wife so that she can apply the unused amount to her tax. Naturally pointless if she is not a taxpayer to begin with, but suppose the figures were something like this. 16 TAX HEALTH CHECK

17 Arthur s income 13,500 Enid s income 11,000 Less PA 10,660 Less PA 10,600 Taxable income 2,840 Taxable income 400 Tax 568 Tax 20% 80 Clearly Arthur only needs about two thirds of the MCA to reduce his tax to nil, so he asks his tax office for form 575 and transfers the unused 267 to Enid. This wipes out her tax bill as well. If struggling with this, get help as usual from HMRC or Tax Help. Not only have your advice and recommendations been invaluable, but your cheerfulness and attitude are beyond words. Sadly, when old age comes to us most people just think we are all beyond help or civility. TAX HEALTH CHECK 17

18 PAY AS YOU EARN Most of you have probably never thought of it in full like that because we are so used to calling it PAYE. And of course it means exactly what it says. You pay tax as you go along earning the income, rather than saving up the unwelcome bill and paying in big chunks later on. This is the system we were talking about in the chapter on codes and how our tax-free allowances are distributed and then tax collected on the rest. The system assumes that we are going to be earning steadily from 6 April one year until 5 April the next and PAYE collects one twelfth of the annual tax each month. If you are paid weekly, then PAYE will collect 1/52 of the tax each week. So what goes into your bank account usually means there is no further tax to pay and you can spend the lot! There can be complications though, of which you ought to be aware. Taking unpaid leave, losing your job and signing on for benefits or dying mid-year can all upset the assumptions on which the tax has been collected to date and will need adjusting. For example, you lose a job paying 20,000 a year at the end of December. You will have paid tax from April to December as if you were going to be earning that until next April. You haven t; you have only earned three-quarters of it. You receive taxable unemployment benefit for the next three months, but that is a far lower amount than you were earning. Thus you can see that there is going to be a need to tot up at the end of the year to see whether you have over or under paid tax. If either is the case, HMRC should send you a form called a P800 showing how they arrived at their conclusion. You should check this form very carefully and get in touch with HMRC if you disagree. If still unhappy contact Tax Help for Older People. 18 TAX HEALTH CHECK

19 Take the unfortunate but inevitable. If a taxpayer dies in, say, October, halfway through the tax year, they will have received one half of their tax-free allowance for the year against half a year s pension. They are entitled to the whole of the allowance for the year up to the date of death and so a repayment will be due to the estate. Another common problem. You only have another small pension besides your state pension and it is not big enough to allow the tax to be collected with a K code (the taxman can only take a maximum of 50% from one source of income). In these cases PAYE cannot successfully cope with the tax bill and you must read the chapter on Self Assessment, found on page 20. The intention of this chapter is to alert you to the fact that PAYE which probably operated quietly and efficiently during your working life can cause you difficulties in retirement for which, as always, you can seek help from HMRC or Tax Help. I would like to thank you very much for helping me with my tax problems after my husband died last year...turned things around for me from owing rather a large sum to them (HMRC) sending me a larger sum in respect of something they hadn t taken into account and which I would not have been able to solve on my own. TAX HEALTH CHECK 19

20 SELF ASSESSMENT This method of paying the right amount of tax is the alternative to PAYE. You don t have to be rich to come under self-assessment (SA), just in receipt of income which is difficult or impossible to tax under PAYE. Nor is it necessarily simply a way of paying tax; it can also be a way of getting overpaid tax back. In essence, it is an annual totting up of all the taxable income which you have received during that year and all the tax which you have paid. Then the Revenue calculate the balance, whether you owe them more money or they owe you money. Let s look at some reasons why you might come under self-assessment. You do some self-employed work You receive a foreign pension You let out a property You have untaxed interest from an NS&I Income Bond You are a higher-rate taxpayer You have an income higher than the age allowance abatement threshold You have only a State pension which is higher than your personal allowances. 20 TAX HEALTH CHECK

21 As you can see from the last point, you can actually be on quite a modest income and still come under SA. In the chapter on PAYE (page 18) we mentioned the situation where you have mainly your SRP and only a small personal pension which is insufficient to bear the total tax bill, so although you may have paid some tax under PAYE on that pension, the remainder must be collected through SA. This means that you must set aside enough money to pay the tax bill by 31 January of the year after the tax date falls due. Example: You have only a state pension at age 68 of 11,000. Your PA is 10,600 so you have 400 of taxable income which at 20% means you owe 80. You should complete your paper SA return by 31 October but the tax is not due until 31 January. You must therefore make sure that you set aside, say, 7 a month so that you have the cash available when it is time to pay it. Not a good idea to ignore it until the last minute and then wonder where to lay your hands on a spare 80 just after Christmas. Your tax office will send a notice to file in April/May and encourage you to file online. If you wish to file on paper it is your responsibility to ask for the paper form. It is also your responsibility to register with HMRC by 5 th October after the end of the tax year if you think you have any untaxed income which should be declared through SA. If you ask for a paper form and your affairs are simple, they will send you a short form of only 4 pages, but if you have any complications such as a bit of pension from abroad, then you will have to complete the full return. If you need help, contact Tax Help for Older People in good time, i.e. June or July, not September or October. Don t be panicked by the large number of boxes on the form only a few will apply to you. The important thing is to keep good records; hang onto payslips, dividend tax vouchers, interest statements and so on. TAX HEALTH CHECK 21

22 PROBLEMS PAYING YOUR TAX? Many people who are unable to pay their tax on time or who find themselves owing tax will worry about the potential consequences, but the worst thing is to ignore the matter. The situation may not be as bad as you think. The golden rule always is to act quickly. If you do nothing at all, you increase the risk of action against you. The worst possible response is to ignore a letter or demand from HMRC which states that tax is due, as this will usually make things worse. Quite often, a quick response can reduce the size of the problem. If you fall within the PAYE system You will receive a P800 tax calculation if you owe more than 50 in tax. First, however, it is very important you check that the figures on the calculation are correct. If the figures are incorrect or the amount is less than 50, you should contact HMRC immediately giving them the correct information. If you agree with the P800 calculation, you should then try to understand why you did not pay enough tax before paying HMRC. This is important in working out whether you fall into one of the limited categories in which you can argue that you should not have to pay the bill. It is possible that the underpayment has arisen due to your employer or pension payer not operating PAYE correctly. For example, they may not have applied the tax code that HMRC sent to them. If this is the case, HMRC should first seek the tax from the employer or pension payer, not from you. Alternatively, the underpayment might have arisen because HMRC itself failed to make timely use of information about you, which they had in their possession, this is covered by their concession ESC A19. In both cases you can ask HMRC to investigate and suspend collection until after they have done so. 22 TAX HEALTH CHECK

23 How is the tax collected? For amounts under 3,000 HMRC will normally collect the unpaid tax by reducing your PAYE tax code for the next tax year. For larger amounts or if it is not possible to collect via a tax code they will write to you asking for a voluntary payment. If you do not respond, they will issue a tax return for the year(s) concerned and you will then fall within the system of self- assessment (SA). The full payment will be due by 31st January after the end of the tax year, with penalties for late filing and interest and surcharges being added for late payments. If you are already in the self- assessment system Contact HMRC as soon as possible and ideally before the tax becomes due. The amount demanded may be wrong. In many cases, you may not agree with the amount of tax shown on your Statement of Account, or demanded by HMRC s Debt Management and Banking section. There could be a simple error - such as failure to credit a payment you have made - which can be sorted out by a phone call to the telephone number shown on your Statement of Account. If you cannot afford to pay (PAYE or SA) If the tax owed is correct, and you cannot afford to pay in one go, HMRC might agree to make a Time to Pay arrangement with you, so that you can spread the payments and get yourself back up to date. HMRC are able to spread payments over five years, but will usually ask you to show that you cannot afford to pay for time periods over three years. This means showing that you do not have enough money to pay what you owe, nor would you be able easily to access money to pay it. HMRC will still aim to collect the debt from you as quickly as is reasonably possible and any tax paid late will attract interest. But if you make a Time to Pay arrangement in advance of the tax becoming due and you stick to it, HMRC should suspend (that is, not charge you) penalties for late payment. An instalment option may cost more in the long run. TAX HEALTH CHECK 23

24 Sometimes you may be contacted by a Debt Collection Agency on behalf of HMRC. You should check that the agency is genuine by comparing it to the list on the HMRC website or by calling HMRC. Debt Collection Agencies have broadly the same powers as HMRC to agree time to pay over up to 12 months. They will not however have any understanding of how the debt has arisen and any queries about the amount should be raised directly with HMRC. Debt Collection Agencies are authorised to contact taxpayers by phone and letter. They are not authorised to carry out personal visits. If the Debt Collection Agency fails to reach an agreement with a taxpayer they will refer the case back to HMRC to consider further enforcement action. If your circumstances mean that you will never be able to pay the debt, for example, you are retired and on pension credit, HMRC may agree to write off the debt under hardship. If, however, you own your property they will want paying eventually but might allow the debt to be paid from your estate when you die. Where can I find out more about getting help with my tax debt? For PAYE and non- business debt you can contact Tax Help for Older People or visit their website for more information on Employer and HMRC error. You can also visit the tax debt section of the TaxAid website. From there, you can also download their tax debt booklet in PDF format, which is a very helpful guide to the steps you should take. (TaxAid is a separate charity providing free tax advice to working people on low incomes who cannot afford to pay a professional adviser and particularly those who are in tax debt crisis. Their service is also independent and confidential.) Contact details can be found at the back of this booklet. 24 TAX HEALTH CHECK

25 INHERITANCE TAX We include here only a short explanation of how the recent changes in Inheritance Tax (IHT) may affect married couples or civil partners. If you are neither, skip this chapter. We will not go into the various ways of reducing IHT or trusts to get around it. The sole point here is the transfer of benefits between spouses. The first 325,000 of estate is exempt from IHT. This is called the nil rate band (NRB) because tax is charged at 0%. Thereafter tax is charged at 40%. With effect from 9 October 2007 it became possible for the NRB of the first to die to be passed on to the survivor. This meant that on second death, the estate could benefit by up to double the NRB in force at the time. A simple example. Arthur dies in May 2012 and leaves everything to Enid. She dies in November, so his 325,000 is added to hers, meaning the estate benefits from 650,000 nil rate. Let s take it a stage further. Enid dies June 2020 when perhaps the NRB has gone up to 350,000. Then the estate benefits from 700,000 nil rate because Arthur s NRB is valued at the rates in force when Enid dies, not the value of the NRB when he died in the earlier tax year. Now a word of warning. In the above example, Arthur left everything to Enid. Suppose, though, that he left 50,000 each to his son and daughter. Now he has used up some of his NRB, just over 32% in fact, so his widow will only benefit from the remaining 68%. In the last bit of the examples above, therefore, the estate on her death in June 2020 would have her assumed 350,000 plus 68% of his 350,000, that is 238,000, totalling 588,000. We must emphasise that it is the unused percentage of the first deceased s NRB which can be transferred, not the cash value at the time. That percentage, however, then translates into the percentage of the monetary value of the NRB in force at the time of the second death. Sorry it s a bit complicated. If you are still puzzled, ask as usual for help. TAX HEALTH CHECK 25

26 CAPITAL GAINS TAX Again, we are only going to mention one important aspect of this tax, abbreviated to CGT. A capital gain can arise between the value on buying or acquiring an asset and selling or disposing of it. You have an annual exempt amount of 11,100 this year. If the gain is greater than this, you may have a liability to CGT and should take professional advice. If lower, then you have no need to worry. Acquiring an asset includes being given it, just as disposing of it includes giving it away. The value is the market value at the time. So if you inherit a house from your favourite uncle, its value is that at the date of his death and if you subsequently sell it, any gain will be the difference between that value and the price for which you sell it (less buying and selling costs). The important exception for most people is the sale of their own house in which they have been living. There is no CGT on this sale. You can buy and sell houses that you use as your main home without tax worries. This does not apply to holiday homes which you may own or houses you let out. Also if you have gaps in your periods of residence or let it out, perhaps when working abroad, there are special rules and you will need advice. The most common question we get at Tax Help on this subject is about the sale of the house when putting an elderly parent into residential care. If that was their main dwelling, then it is exempt from CGT on sale, however the rules on the period of ownership once you have left the house have changed and you should seek professional advice. Naturally if the proceeds are then invested to pay for the care, the interest will be subject to income tax rules, but that is a different matter. Yet again, I send grateful thanks to this amazing organisation which has restored my peace of mind. 26 TAX HEALTH CHECK

27 PAPERWORK & FORMS If you are fortunate, you have enjoyed many years of minimal or no contact with a tax office, but you are about to enter a new period of your life involving dealing direct with HMRC to a greater or lesser extent. This is partly because you are no longer shielded from them by an employer and payroll office, and partly because of your changing financial circumstances. These are some of the most common forms you may receive or be asked to complete. P2 PAYE coding notice You may not be familiar with this form if you have previously been employed. HMRC send out notices of coding every year to pensioners but they generally do not send them to people with simple affairs where there has been no change to the individual s allowances beyond any annual indexation. You should however insist that they send you one every year so that you can check whether you are being given the right allowances and that your employer/pension provider is using the correct code. It is especially important when you have more than one source of income apart from your state pension, because all too often the PAYE system and multiple tax offices fail to cope with this situation. The P2 should make clear what allowances are being given against each source of income, as well as how much state pension they are taxing. If you think anything is wrong or you do not understand it, you should take it up with your tax office and get it explained or corrected. Otherwise HMRC will assume that all is well, and if the code turns out to be incorrect they may, at a later stage, want you to pay tax arrears on the grounds that you should have known your tax was wrong. TAX HEALTH CHECK 27

28 R85 Form to get interest income paid without tax taken off This form, obtainable from your bank or building society, certifies that you are not a taxpayer and can therefore receive the interest without deduction of tax. You can always sign an R85 if the total of all your taxable income (including the gross interest from the savings accounts) is below your personal allowances. The form should come with a helpsheet to assist you in calculating whether you are a taxpayer. Make sure that it is up-to-date. You will have to sign one for each and every account that you hold. Remember that under the new rules you can also sign an R85 if you estimate that your total taxable income from all sources (except dividends) will not exceed the sum of your personal allowance plus the 5,000 band taxed at 0%. Don t forget to revoke all R85s if your taxable income rises above this level. R40 Tax repayment form An important form if you have overpaid tax on savings. For instance, you may only be liable for tax on your savings at 0% but your savings account will have had tax deducted automatically at 20%, so you will want to reclaim the overpayment. This form is obtainable from the R40 orderline option 3 or downloadable from the HMRC website and you need one for each year for which you wish to make a claim, up to the maximum of four previous years. On this form you list all your sources of taxable income and the tax you have already paid, so that HMRC can work out how much you should have paid and therefore how much to repay you. Self Assessment HMRC will encourage you to file online, should you wish to file on paper you have to contact HMRC and ask for the following forms. HMRC will decide which one they want you to complete. If you choose to file on paper you need to do this by the 31 st October after the end of the tax year. 28 TAX HEALTH CHECK

29 SA100 The self assessment tax return form When your tax affairs are complicated in any way, you may find yourself having to complete an annual tax return. On this rather daunting form, you enter all the information required for HMRC to collect the right amount of tax: your various incomes, your claims for reliefs and allowances, expenses, pension contributions etc. You may have to ask for additional pages if you have, say, capital gains, rental income or a foreign pension. The onus is on you to tell HMRC if you think you need to complete a tax return. Conversely, if HMRC have issued you with a tax return, you must complete it. If you believe you do not need to complete a return contact HMRC and ask for it to be cancelled. SA200 The short tax return form This is a simplified four page return for people whose affairs are reasonably straightforward. The tax office will decide if you are able to use this. Conversely you might need to request a long return if the short one doesn t cater for your needs e.g. foreign pension. The form should be completed and sent back by 31 October for the tax office to prepare the tax calculation. Payments of tax and interest charges are exactly as for the full self assessment tax return form. P161(W) Coding enquiry after bereavement This form is sent to the spouse or civil partner after their partner has died to sort out the new income and taxation situation of the survivor, because in most cases there will be changes in their pensions and savings which will need new codes. We advise you to contact Tax Help for assistance. HMRC are reviewing this form, so it may not be around for much longer. TAX HEALTH CHECK 29

30 P800 - Tax Calculation This form is only issued if either HMRC owe you money or if you owe more than It is created at the end of the tax year and sent out during the summer months. It is important that you check the figures carefully and to contact HMRC if you disagree with them. If you owe money you may be able to challenge it. The accompanying notes on page 22 explain in more detail. I had received so many forms over the last few months. Without the help of your tax adviser I am sure I would have sent the wrong information. Many Thanks 30 TAX HEALTH CHECK

31 RATES & ALLOWANCES 2015/2016 PERSONAL ALLOWANCES Born after 5 April ,600 Born before 6 April ,660 (Note higher age allowance available for whole of the year in which you became eligible.) Blind Person s Allowance 2,290 Married Couple s Allowance 8,355 (Note. MCA only worth 10% of face value and reduces tax due, not tax-free income.) Income threshold before age allowances reduce 27,700 (Note. Withdrawn by 1 for every 2 of income above threshold until reduced to the basic personal allowance. Thereafter MCA reduces in the same way to a minimum of 3,220.) TAX HEALTH CHECK 31

32 RATES & BANDS First 31,785 of taxable income 20% Thereafter up to 150,000 40% 150,001 and upwards 45% But First 5,000 of savings interest 0% Otherwise standard savings rate 20% (Note higher rate taxpayers have a further 20% to pay, additional rate a further 25%) Dividend tax credit 10% (Note higher rate taxpayers have a further 22.5% to pay, additional rate a further 27.5%.) Capital Gains (CGT) Above annual exemption of 11,100 (Higher rate taxpayers 28% - gain must be added to income to apportion rates) 18% Inheritance tax (IHT) Above Nil Rate Band of 325,000 40% 32 TAX HEALTH CHECK

33 USEFUL CONTACTS Tax Help for Older People T: or Unit 10 Pineapple Business Park Salway Ash Bridport Dorset DT6 5DB E: Her Majesty s Revenue & Customs (HMRC) or the telephone number on any correspondence from them General helpline The Department for Work & Pensions All information on state pensions and disabilities has now moved to To claim your state pension call Tax Aid T: Linton House Union Street London SE1 0LH TAX HEALTH CHECK 33

34 Chartered Institute of Taxation (CIOT) T: Artillery House Artillery Row London SW1P 1RT E: Association of Taxation Technicians (ATT) T: Artillery House Artillery Row London SW1P 1RT E: Both CIOT and ATT, the professional bodies to which most qualified tax advisers belong, can help you find a tax adviser in your area. Low Incomes Tax Reform Group LITRG has a wealth of research and information on tax as it affects people on low incomes. 34 TAX HEALTH CHECK

35 Record of calls to HMRC/DWP Date... Time... Officer... Location... Issues discussed Advice given Date... Time... Officer... Location... Issues discussed Advice given TAX HEALTH CHECK 35

36 Disclaimer Whilst every effort is made to ensure that the material contained in this document is accurate and up to date at the time of publication, Tax Help for Older People remind readers of the need to check that the information is accurate and current before making decisions affecting their financial situation. Tax Help for Older People Pineapple Business Park, Salway Ash, Bridport, Dorset DT6 5DB Tel: or Website: Tax Volunteers is a company limited by guarantee Number Registered Charity in England and Wales No Company Registered Office: Artillery House, Artillery Row, London SW1P 1RT 36 TAX HEALTH CHECK