20 February 2015
Just when a lot of pensioners thought they would be outside of the tax net, with rising personal allowances and an intended new £5,000 nil-rate band for savings income, the Government has dreamed up a way of getting them back in to the tax system by having to make repayment claims. Or perhaps, it’s a way of increasing the tax take on savings by the back door?
Avoiding a Meldrewesque rant may be quite difficult on this subject, but you really couldn’t make this up. So what’s the cunning plan? Well on the face of it, it’s something beneficial – the so-called Granny Bond, available to those who have reached 65 and so eagerly subscribed for on launch earlier this year. An enhanced rate of interest for pensioners; well, yes, but also subject to deduction of basic rate income tax at source. This, juxtaposed with a personal allowance of £10,600 and a nil rate band of £5,000, means that pensioners with modest pensions of up to £10,000 or so and comparatively small amounts of savings income, who may have been tempted by the new savings offering, will be in a position to reclaim any tax suffered on their Granny Bonds. This may be a few hundred pounds, but for those who can’t do it themselves, professional fees for making the repayment claim may eat into the repayment significantly.
Of course, it should be possible for HMRC to help out, but those pensioners with no on-line access or a dislike of waiting in a call-queue don’t have an alternative, since all the local tax enquiry centres were closed last year.
At the other end of the scale, those pensioners who are higher rate taxpayers and who have opted for the 3 year higher interest rate bond could find themselves with a cash flow disadvantage. Interest will be credited to their bonds annually and therefore will be taxable each year, but withdrawal will be prohibited until the end of the 3 year period if interest penalties are to be avoided. So these taxpayers may find themselves paying tax on income to which they have no immediate access.
A solution for non-taxable pensioners could be to allow the R85 scheme to be extended to these bonds, so that the income isn’t taxed at source for individuals who apply. A solution for the upper end of the scale problem is less urgent, but perhaps the interest shouldn’t be taxable until the bond is accessed.
More worryingly, if bond rules stay as they are, how many of the less well-off won’t bother, or be able, to make a claim for the tax overpaid?
If you would like to discuss the details of this blog post further, please contact John Sheehan from our Letchworth office or a tax adviser at your nearest location. Alternatively, you can complete our online contact form.