Fairer taxation of Retirement Annuities

Around a million pensioners who receive retirement annuities will be contacted over the next two months to remind them of changes to the way HM Revenue & Customs (HMRC) will tax their annuity income.

From 6 April 2007, retirement annuities will be taxed through Pay As You Earn (PAYE). This will make sure that just the right amount of any tax is taken off - so long as HMRC have up-to-date information from the pensioners.

From this month, HMRC will start sending out letters, leaflets and forms to pensioners who receive annuity income, to explain how the change will affect them.

Currently, unless pensioners have told HMRC that they are not liable to pay any tax on their total income, the company paying their retirement annuity deducts basic rate income tax of 22%.

This means some pensioners have ended up paying too much tax, and have had to claim it back every tax year. Some may not even know that they have paid too much tax, and HMRC is helping them to claim any repayments which can include up to six tax years.

Conversely, some pensioners may have under-paid tax, particularly where their retirement incomes have gone up since they first told HMRC that they were not liable to pay any tax.

Mike Shipp, HMRC`s Director of PAYE, says: "The change means that every pensioner need only pay the right amount of tax from April 2007 onwards, and there will be no need to make repayment claims every year."

"Where we find that a pensioner`s circumstances have changed and some tax should have been paid in the past, we won't be asking anyone to pay us that tax, unless there has been a deliberate attempt to make false statements or tax returns."

Mike Shipp continued: "I can assure pensioners that this change won't mean that they have to pay back any tax, but if they've paid too much, we will help them make a claim and repay it to them."

HMRC have set up a helpline on 0845 366 7868 to explain the changes to people who are getting annuities, help them with repayments and check they will only be paying the right amount of tax, if any, from April. The helpline is open Monday to Friday from 8:30am to 5:00pm.