Tax traumas face employees and pensioners

THE INLAND Revenue is rushing out PAYE coding notices to employees, ready for the new tax year on 6 April.

Beware, it could well be wrong, and you could easily end up paying too much tax.

The PAYE system is meant to be simple, but the last two Budgets have made it horrendously complicated.

The Revenue has to guess in advance which taxpayers will have sufficient income to take them into the 40 per cent band.

Michael Norrie, of the chartered accountants Norrie Stokes and Perrett, says: 'The Revenue is making wild assumptions that people are 40 per cent taxpayers and they are not. As a result their coding notices are completely wrong, but how many people will pick up the error?'

Car benefits are also a nightmare to check in the coding. From 6 April the basis of assessment will be 35 per cent of the price of the car.

Some employers have been asked by the Revenue to give price details of the cars supplied to employees so that the tax people can do their sums.

There is no obligation on employers to tell their staff what price they have put on the car for the Revenue. Mr Norrie says: 'I suspect few employees have been supplied with the information. As a result it is virtually impossible to check your coding.

'To make matters even more complicated, the 35 per cent of price benefit is reduced by one third where business mileage is greater than 2,500 miles and by two thirds where it is greater than 18,000 miles,' he added.

The Revenue sends your accountant copies of your tax assessments but does not bother when it comes to codings. If you want your accountant to sort it out for you, make sure you send on a copy.

Most people are expecting a rise in their tax bills. But a bombshell is lurking for some over-65s who will have to pay even more tax than they thought because of sneaky changes in age allowance - the extra tax allowance for pensioners with only modest income - buried in the Finance Bill.

People over 65 who have a mortgage to buy a life annuity - a home income plan - were told categorically that their rate of tax relief would not be affected by the Chancellor's proposals to limit relief to 20 per cent; they would continue to get tax relief at the basic rate.

David Rothenberg, a partner with the chartered accountants Blick Rothenberg, says: 'They did not point out that mortgage interest will no longer be deductible from income for calculating age allowance.

'It is monstrous. Pensioners are being hit when they were told categorically otherwise. At least as many pensioners are going to be harmed by the changes as protected by the home annuity rule.'

In the very worst case, a couple both aged over 75 could face an extra pounds 659.50 on their tax bill.