Pension Underpayment - Lump-sum TAX issue

JazzyJim

Hi,

Long time reader, first time poster!

Wasn't sure if this should be in pension or tax forum, so please move it as required.

I'm hoping for some help on behalf of my father.

He drew pension from his company Staff Pension Scheme from February 2004. (we felt the pension monthly payment at the time was too low, but were told it was correct)

Scheme had started wind-up proceedings prior to pension being drawn. (not sure of exact date)

Scheme folded in November 2012 (due to insolvency of the company and a shortfall in the pension scheme funding) and was transferred to the Financial Assistance Scheme (FAS)

They (FAS) immediately noticed pension had long standing underpayment and paid him single lump sum of £104,675.46 in December 2012.

He was getting paid ~15k a year, should have been ~25k a year. (don't even start me on my parents' loss of that income for those 9 years!)

Total tax paid on the lump sum was £52,108.66 (via tax codeK1311 MTH 1).

I think this is rather unfair - as they should surely spread the tax calculation for lump sum over all his pension years (as if payment was correct, that's how he would have been paid). He's never been close to paying 40% in any year given his pension above.

I'm clueless, but after some googling I found HMRC ref EIM74103 (Arrears of Pension)

So what I think I’d like to do is request that the tax liability for the lump sum is recalculated over the total term of pension underpayment (approximately 9 years), as I believe he is owed a refund of a significant portion of the tax paid on the lump sum.

I also do not understand why the total tax on the lump sum was approximately 50% of the sum regardless of anything else.



Could any kind soul shed any light on:

• whether my thinking is correct?
• why on earth they took 50% tax on the lump sum?
• The exact process for progressing this (happy to phone the tax office, but want to be fully prepared for battle first).
• Can I complain to anyone about the original mistake? I detest this modern compensation culture, but I'd at least like to make sure this doesn't happen to anyone else.

Many thanks in advance.

mania112

To be honest, I'm not sure if there's any sort of claim process for situations like this. The best people to speak to are HMRC, so give them a call.

What I do know is that you are entitled to a rebate because:

50% tax was charged on the lump sum because PAYE assumes you're receiving that amount every month (believe it or not).

50% tax didn't start until annual earnings of £150k, which wasn't reached. So only 40% tax applies, so you'll get the difference back. Again, HMRC can help you with that.

JazzyJim

Many thanks for the quick reply. We'll phone them tomorrow for sure.

Am I also correct in thinking that really it will end up only 20% tax applies because the underpayment occurred over so many years, that what HMRC should really do is spread the single 104k over 9 years and reassess the total taxable income each year?

Well at least that's what it seems to suggest on HMRC site (ref EIM74103):

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.

It's just amazing to me that if I hadn't stuck my nose in, my father could lose 30K in tax. (still might, trying not to get his hopes up!)

Thanks again.

mania112

JazzyJim wrote: »

Am I also correct in thinking that really it will end up only 20% tax applies because the underpayment occurred over so many years, that what HMRC should really do is spread the single 104k over 9 years and reassess the total taxable income each year?

That's the part i'm not sure about (because i've not seen that issue before), but the information you have seems quite promising.

xylophone

http://www.hmrc.gov.uk/manuals/sammanual/sam121160.htm
Taxable pension is the amount to which the pensioner is entitled in the tax year. A payment of arrears of pension may be a substantial sum covering a number of tax years and the statutory (accruals) basis should thus be applied on request where it is to a taxpayer’s advantage.

atush

It certainly would be fair that the tax paid on the LS would have been the tax owed, and not put all into one year. I personally feel that interest should be paid, but realize if the company is defunct that the taxpayer should not have to pay this interest. This should have been paid by the company/administrators had they not been insolvent.


Do make sure this is the case for your parents, in that they have the best outcome possible under the PPF. Hopefully the extra 10K will make a good upgrade to their living situation/comfort? And that you can mitigate the tax owed.

JazzyJim

Thanks to all.

Agreed I don't expect anything more from FAS - incredibly grateful they've stepped in to cover the pension in the first place.

I'll speak to HRMC and then post the result here, in case anyone in the future is searching for this type of thing.

JazzyJim

Hi,

Just an update (and further questions!) on this one after 7 months of struggling with HMRC.

Briefly - the way the case has been handled has been awful. Had to make a formal complaint to get it moving. No one would do anything by phone, and each letter took a month for reply. And rather than look at what was being requested (I'm not remotely familiar with this stuff but I thought the request was fairly clear) and assess requirements up-front, at each monthly letter they ask for a single new piece of additional information!
First it was statement of underpayment, then P60 for that year, then a tax return, then they 'lost' all correspondence, so got that again and now they've asked for P60s for every year of the underpayment.

Anyway, sorry for the rant, the last request is where my question comes in:
The underpayment was 2004 onwards - unfortunately my dad does not have P60s that far back. And he cannot get them from the pension scheme as it has folded.

Any ideas how we could get this information? I thought HMRC also got sent copies of all P60s so strange they are asking us for them?

Any help greatly appreciated.

Cheers.

xylophone

unfortunately my dad does not have P60s that far back.

That is unfortunate - they do usually have a "do not destroy" or "please keep" on them.

I am assuming that your father had his pension paid into a bank account - is he able to obtain his bank statements for the years in question?

xylophone

7 months of struggling with HMRC.

they 'lost' all correspondence,

Unreasonable delay? http://www.taxation.co.uk/taxation/Articles/2013/02/13/53701/don%E2%80%99t-hold-back

JazzyJim

Hi, Thanks for the replies.

Yes they do indeed say do not destroy - that's an argument we've already had! (He thought it was only keep for 5 years for whatever reason...........)

I'll try the bank statements next (although not hopeful with his '5 year' rule)

In terms of complaining - we are already at a tier 1. Tier 2 could be next. I'm not complaining about their requirements (even though it doesn't look like we'll now be able to meet them) I'm complaining about the length of time it takes to get them to tell us everything we need.

My dad thinks they are 'at it' to avoid paying out - I think they are just a huge inefficient organisation with terrible processes and systems.

But just a final question for clarity - Am I wrong to think that HMRC get sent a copy of everyone's P60 every year anyway? So is it fair to ask why they don't already have it on file?