Those individuals who receive income from a retirement annuity contract (an old type of pension) should expect a change to the way in which these are taxed from April 2007.

Currently these pensions are generally paid after 22% tax has been deducted from them or gross where the taxpayer has signed the necessary form R89. Gross payment is only appropriate in certain limited circumstances where the taxpayer has personal allowances available to cover the full amount of the annuity. This would apply where the individual had very little untaxed income.

From April 2007 the income will be taxed as pension income, subject to PAYE tax deductions. Those affected will receive a coding notice form P2 showing the tax treatment going forward. The change to PAYE treatment means that there is more flexibility with the amount of tax deduction made. This should stop under or overpayments of tax arising on this type of income.

If you think you may be affected by these changes please get in touch.

Internet link:

Tax Bulletin