State pension and tax

kuepper

When i got my state pension this year I received a new 2013/4 tax code based on the amount of state pension (inc 2nd state pension) hmrc estimated I would receive in the current tax year. This pension amount was deducted from the £9440 personal allowance so I was left with a tax free amount of £4250 and a tax code of 425L for my pvte pension to utilise in working out my net payment. No problem with that (though I never realised state pensions were taxed, what a scam).

Out of the blue I've now received a new code from hmrc as if I'll receive a full year's state pension in 2013/4, and as this exceeds the £9440 allowance I now have a tax free amount of zilch and code BR. In the notes it says that hmrc know I won't be getting the full amount of pension this year but they have reduced it so that my pension fund will only tax me on the actual amount of pension I receive, and that i will only be taxed on the pension for the number of months or weeks I get it. How can that possibly be?

I'm going to try and get hold of them tomorrow but thought i'd tap ppls brains here first, assume other ppl must have had the same issue?

jem16

kuepper wrote: »

(though I never realised state pensions were taxed, what a scam).

State pensions are taxable income just like any other pension. Why is it a scam?

In the notes it says that hmrc know I won't be getting the full amount of pension this year but they have reduced it so that my pension fund will only tax me on the actual amount of pension I receive, and that i will only be taxed on the pension for the number of months or weeks I get it. How can that possibly be?

They will be using the tax code on a Mth1 basis as opposed to the normal cumulative basis. This means that your tax will just be looked at each month in isolation. If they had changed it to BR cumulative you would have had to pay back some tax from the previous months.

At the end of the tax year, add up your total income and work out the tax yourself to see if it's correct.

kuepper

jem16 wrote: »

State pensions are taxable income just like any other pension. Why is it a scam?

They will be using the tax code on a Mth1 basis as opposed to the normal cumulative basis. This means that your tax will just be looked at each month in isolation. If they had changed it to BR cumulative you would have had to pay back some tax from the previous months.

At the end of the tax year, add up your total income and work out the tax yourself to see if it's correct.

No problem about voluntarily entered pvte pensions being taxed, I just assumed that having had to pay NI for 40+ yrs it was only fair and equitable it shouldnt be taxed. As for rest, I still don't get it so must be missing something. My actual income from pension for 2013/14 was calculated correctly by hmrc in my 1st post- pension code notice, nothing is going to change before april 5th so why code me as if I will be getting 000s more pension than is actually the case? What do you mean that they will be using the code on a Mth1 basis, why look at my tax each month in isolation when my state pension is 100% predictable? Don't know what you mean by 'BR cumulative' and having to pay back tax, why would I have had to do that?

jem16

kuepper wrote: »

No problem about voluntarily entered pvte pensions being taxed, I just assumed that having had to pay NI for 40+ yrs it was only fair and equitable it shouldnt be taxed.

It's income so it is taxed. If you just received only the state pension it would probably not be taxed.

As for rest, I still don't get it so must be missing something. My actual income from pension for 2013/14 was calculated correctly by hmrc in my 1st post- pension code notice, nothing is going to change before april 5th so why code me as if I will be getting 000s more pension than is actually the case?

Perhaps they have worked out that you are not paying enough tax with the code left as it is? With the RTI system now in place. HMRC should be receiving accurate info each month on your pension. How much private pension income do you receive each month?

What do you mean that they will be using the code on a Mth1 basis, why look at my tax each month in isolation when my state pension is 100% predictable?

Apparently this is how they operate the tax code in the first state pension year. If they look at the whole year you would pay too much tax.

Don't know what you mean by 'BR cumulative' and having to pay back tax, why would I have had to do that?

They have given you a BR tax code on a Mth1 basis. If they gave you the BR tax code on a cumulative basis, the first thing the tax code would do was look back at the whole tax year and say you should have been paying 20% tax since April 6th. Obviously you weren't so you would be paying extra tax to make up for it.

margaretclare

No problem about voluntarily entered pvte pensions being taxed, I just assumed that having had to pay NI for 40+ yrs it was only fair and equitable it shouldnt be taxed.

I can't imagine why you ever thought that. What happens is that your pensions income from all sources - state, private, annuities, whatever - is totalled up and you pay tax on whatever falls outside your tax allowance.

le_loup

I suspect that his tax knowledge is as lacking as his social skills, judging by the curt response to jem's helpful reply!

xylophone

if you just received only the state pension it would probably not be taxed.

The State Pension plus Additional State Pension can exceed the personal allowance.

http://www.hmrc.gov.uk/pensioners/pension-statepension.htm

kuepper

jem16 wrote: »

It's income so it is taxed. If you just received only the state pension it would probably not be taxed.



Perhaps they have worked out that you are not paying enough tax with the code left as it is? With the RTI system now in place. HMRC should be receiving accurate info each month on your pension. How much private pension income do you receive each month?



Apparently this is how they operate the tax code in the first state pension year. If they look at the whole year you would pay too much tax.



They have given you a BR tax code on a Mth1 basis. If they gave you the BR tax code on a cumulative basis, the first thing the tax code would do was look back at the whole tax year and say you should have been paying 20% tax since April 6th. Obviously you weren't so you would be paying extra tax to make up for it.

sorry for my ignorance but what is RTI? I also don't have the knowledge to understand what you mean by Mth1 basis nor cumulative basis - how do you know which basis they have given me it on - could you try and explain in a different way?

jem16

kuepper wrote: »

sorry for my ignorance but what is RTI?

Real Time Information = RTI

Up until this year HMRC had no idea what income you were receiving from employers and pension providers until the end of tax year returns in around May/June after the tax year ended in April.

Now with RTI, HMRC should know exactly what you are receiving at the time you receive it. Hopefully should make tax more accurate more quickly. Whether it does or not I have no idea.

I also don't have the knowledge to understand what you mean by Mth1 basis nor cumulative basis - how do you know which basis they have given me it on - could you try and explain in a different way?

Tax codes work on a cumulative basis - ie each month you get one twelfth of your allowances and one twelfth of each tax band. With each month it works out how much income you received and how much tax you have paid and taxes you correctly. So month 2 you get 2/12ths of your allowance and 2/12ths of each tax band. Month 3 you get 3/12ths and so on. At the end of each tax year your tax paid is correct as it makes any adjustments necessary. This works well for one income, especially where you have an income that is constantly changing each month or week.

With a non-cumulative tax code ( or Mth1/Wk1 ) your income and tax is looked at with only that month in mind. You will get 1/12th of your allowance and 1/12th of each tax band but it will not look at previous months and will not make any adjustments. This could leave you with an overpayment or underpayment depending on what has gone on before.

HMRC have readjusted what they think you will be getting as a state pension throughout the whole year. A cumulative tax code would have expected that amount to be for the whole tax year and not part of it. The non-cumulative tax code simply looks at what would happen each month from the tax code change.

I think this is where HMRC have gone with this change but without facts and figures which you haven't supplied I can't be sure so perhaps you should phone up and ask although I'm not sure you will understand the answer anyway.

kuepper

many thanks for that explanation but as you've guessed would be the case I still don't really get it. I've never had any dealings with tax before now, just left it to trust if it seemed to be right but this didn't seem to be right. As for RTI hmrc correctly stated my exact state pension income for 2013/4 in the first tax code notice I got a few days after pension age so I don't get why a month later they've changed it and why my pension fund couldn't just use the first code for the rest of the tax year, surely with the revised code they will overtax me as I will hereafter be paying tax on every £ of income (pro rata of £7000 pvte £10000 state pa in round figures)

mumps

kuepper wrote: »

many thanks for that explanation but as you've guessed would be the case I still don't really get it. I've never had any dealings with tax before now, just left it to trust if it seemed to be right but this didn't seem to be right. As for RTI hmrc correctly stated my exact state pension income for 2013/4 in the first tax code notice I got a few days after pension age so I don't get why a month later they've changed it and why my pension fund couldn't just use the first code for the rest of the tax year, surely with the revised code they will overtax me as I will hereafter be paying tax on every £ of income (pro rata of £7000 pvte £10000 state pa in round figures)

You are still entitled to your tax free amount of income for the year so if you haven't received that amount of tax relief there is no reason why you should be on BR. Have you phoned the tax office? They will be able to check your record and explain what is going on, people on here can only guess.

Sorry, just reread the original post and realise you are talking to them tomorrow, that is the best plan. Good luck.