Underpaid pension

cadenza82

Dad has recently been notified by his employer that they have been underpaying his pension for the past few years. He took early retirement in 2005 and has been drawing the pension from that employment since then. He went back part time to the same employer and has been paying into another pension since then. As he turned 65 today, they've obviously undertaken an audit to see whether they've been paying the right amount.

It seems he's been underpaid about £3,200, and they have also said they will pay interest of about £300. The underpaid pension is going to be paid through PAYE next month, but he's been given the interest payment direct. Is this payment liable for income tax? If so, presumably HMRC need to be notified of this amount? And if so, how do they collect the tax on it?

It all seems a muddle to me, and if I were him, I think I'd be quite cross!!!

David

xylophone

http://www.hmrc.gov.uk/manuals/eimanual/eim74103.htm - might help.

bobthedambuilder

I guess it really depends on how much pension he was originally being paid. If that took him over the personal allowance each year, (i.e. if he paid tax on the original pension) then he's not going to lose out by being paid the £3200 arrears which will be taxed in the year it's paid (unless that takes him into the 40% tax bracket). It is of course complicated by the fact that he's also working part time, but you get the general picture.

You don't say whether the interest he's already had was tax paid. Whether it is or not, he would have to declare it (it goes in a different box if he's filling in a Self Assessment form - if not, he needs to notify HMRC of the payment.).

I wouldn't be too cross. This is an unexpected windfall.

xylophone

Link above seems to cover it.

"Arrears of pension
If a pension provider discovers a long-standing underpayment of pension, the underpayment is calculated and paid in a single sum. The provider is required to operate PAYE on the lump sum, which may give rise to higher rate liability for a pensioner who is usually a basic rate taxpayer. The pensioner should contact the tax office and supply a schedule showing the years to which underpayments are attributable. HMRC will spread the payments back over the relevant years and recalculate liability. Underpayments in the earlier years may be set-off against the resulting over-payment in the year of the lump-sum payment."