tax on pension

Ainsley1

Not sure if this is the best location or would cutting tax be better but in the end plumped for here!

This last tax year I started being paid a pension. Due to timing my employer's scheme took tax off initially under emergency code until they were informed of the code to use by the tax office. As I have another pension it transpired that emergency meant the tax taken off for the first few months was insufficient.

I did not find out till doing self assessment that I therefore owed tax as the tax office told the pension provider not to apply the code for the whole tax year what,so it transpires, is called month one basis.

This was the first time I was aware that a code does not apply for the whole year. Moreover the coding notice told me the coding was applied to make sure the tax was correct for the year! It patently did not as I had to make up the shortfall!

Is this common/typical?
Can I get redress from the tax office or at least get the issue highlighted for others or even better the notice changed.

Hmrc are being slow-perhaps no suprise there and we agree the pension provider is not at fault. Note the pension started exactly at the start of the tax year.

Any help to resolve this or make others aware so they do not have the same sudden problem would be appreciated.

greenglide

No you cannot, under normal circumstances get "redress".

Ultimately it is your responsibility to ensure that the tax codes issued by HRMC are "correct", any under or overpayment will be addressed at the year end, as yours seems to be.

If you have multiple sources of income the employers / pension schemes cannot see what each other is doing. If the tax payer understands how the tax system works you can ensure that the codes are "correct" and get them adjusted during the year. If you don't understand the system (a worrying number of people don't or won't) you have to wait.

jem16

Ainsley1 wrote: »

I did not find out till doing self assessment that I therefore owed tax as the tax office told the pension provider not to apply the code for the whole tax year what,so it transpires, is called month one basis.

This was the first time I was aware that a code does not apply for the whole year. Moreover the coding notice told me the coding was applied to make sure the tax was correct for the year! It patently did not as I had to make up the shortfall!

Is this common/typical?

Yes it is both common and typical practice for HMRC to issue a Mth1 tax code where issuing a cumulative tax code would have seen a large tax payment being taken in one single month. They do this to help the taxpayer avoid a lot of tax being taken at once and possibly causing financial difficulties.

Can I get redress from the tax office or at least get the issue highlighted for others or even better the notice changed.

The P2 Coding Notice is usually very clear. I had exactly the same situation in February and the Special Note on Page 2 highlighted exactly what the underpayment was likely to be. It also clearly said that my new tax code would allow the correct amount to be taken from now on but that there would be an underpayment that would be looked at on my tax return.

Was there a Special Note on the back of your P2 Coding Notice and did you read it?

If you did not wish this to happen you could have phoned HMRC and asked them to issue a cumulative tax code and paid the underpayment right away.

As to redress I can't see why you would be looking for this as you will actually be in a better position due to the way it's been handled.

If a cumulative tax code had been issued you would have had to pay the underpayment in one single month when that new tax code was issued.

As it is now, your underpayment will probably be handled as a correction to your 2016/17 tax code where you will pay the underpayment over 12 months - so basically a tax free loan, in your case for over 2 years.

How much is the underpayment?

Ainsley1

Thanks both for such a prompt reply, certainly beats HMRC but you also caught me out and then I managed a short last minute holiday ( ala MSE budget saving!) so apologies for only just responding.
Both your posts clarify the position but I did come across a statement by the Citizens Advise Bureaux ( that many lay people might use) that seemed to be in contradiction a bit

This enables your employer or pension payer to deduct the correct tax in future and refund any overpaid tax caused by the emergency code. Moving to the correct code may mean you owe tax for the earlier part of the year but HMRC will tell your employer to only deduct reasonable amounts. You may therefore have to pay back some tax later on.

[ my underlining]. For any one interested their PAYE info is at
the following link https://www.citizensadvice.org.uk/tax/how-to-pay-income-tax/the-pay-as-you-earn-paye-system/

Also of interest may be the Low Incomes Tax reform Group's website, in my case the link at http://www.litrg.org.uk/tax-guides/employed/what-if-i-do-not-pay-enough-tax.htm

If can address the point you respond with approximately in the order that you raise them?

I understand my responsibility to check my coding - though how one can do this properly at times defeats me especially when HMRC sends the wrong info which in my case they did. It all appeared OK based upon the notice wording. I am fairy switched on financially (obviously not enough as had never heard of or come across month one codes in all my working life or with other pensions I have they all worked perfectly!) and I do think that taxation is a specialism that cannot be understood by all sufficiently well.

Yes it is both common and typical practice for HMRC to issue a Mth1 tax code where issuing a cumulative tax code would have seen a large tax payment being taken in one single month. They do this to help the taxpayer avoid a lot of tax being taken at once and possibly causing financial difficulties.

I can see the aim is useful and considerate but as said it was new to me. The issue I have is that if I had been told it was a month 1 basis and not cumulative I could have taken action but the notice clearly stated that the coding would be applied so that at the end of the year I would have paid correct tax ( obviously possibly only approximately). The notice was incorrect, was it not , as it did not tell me it was on a month 1 basis (which I would not have understood and would have needed to research). The end result is that the aim

avoid a lot of tax being taken at once and possibly causing financial difficulties

did exactly that by deferring the 'large payment' until later when the issue was apparent when doing my self assessment. The sum was not huge ( was still the same two months under paid tax [ less than £400] but I still had to find that out of me pension income/savings to send off with the assessment.

Surely this is no fault of mine, it was not the fault of the pension provider, it's cause was the incorrect coding notice issued by HMRC?.. and yet there is no redress for a very tight month?

I agree Jem about the normal clarity of the P2 (provided one understands the wording) but in this case there was no such special note regarding month one and the wording elsewhere also implied thee would be no issue. Again I can understand the logic of the action but in this case not the communication drop off!

As it applied to the self assessment that I did for year 14/15 -after the PAYE change deadline- then it could not be handled as a correction for the following tax year.

It is not the case that I am better off ( yes I did unknowingly have in my possession government owed money) but it came as a surprise that I had and a shock to my budget!

Interestingly HMRC agree the circumstances that it was not the pension provider's fault but have totally ignored their error, not even an implied apology, and it took about 4 months for them to reply and only then after I sent them a second letter.

At least if others read of this case, as I am now, they may be more aware of the month 1 basis and the need to check when codes change or notices are sent out. HMRC tell me that if the fault had lain with the pension provider HMRC could possibly have recovered the underpayment from them... but if HMRC makes a mistake.........???

Well the LITRG website mentioned earlier seems to imply otherwise but I wonder if it would be any use in my case asking for the tax to be written off owing to their misinformation!

mgdavid

I can't add anything other than to suggest you re-read post #2.

jem16

Ainsley1 wrote: »

The notice was incorrect, was it not , as it did not tell me it was on a month 1 basis (which I would not have understood and would have needed to research).

Coding notices never use the words Month 1 basis. They say something like tell your employer to use the code on a special basis.

Payslips however usually show the code with a Mth1 suffix. Did you not notice there?

The end result is that the aim did exactly that by deferring the 'large payment' until later when the issue was apparent when doing my self assessment. The sum was not huge ( was still the same two months under paid tax [ less than £400] but I still had to find that out of me pension income/savings to send off with the assessment.

You didn't have to send any money off with the assessment. For tax year 2014/15 you have until the end of January 2016 to pay the bill. You could also have chosen to have it coded out during tax year 2016/17 so that you pay a little extra each month rather than one lump sum.

Surely this is no fault of mine, it was not the fault of the pension provider, it's cause was the incorrect coding notice issued by HMRC?.. and yet there is no redress for a very tight month?

Multiple income sources are always difficult to handle without help from you as the taxpayer.

However there was no need for a tight month as the normal options for repayment seem to have been ignored by you. What made you think you had to send off payment with your actual Self Assessment return?

As it applied to the self assessment that I did for year 14/15 -after the PAYE change deadline- then it could not be handled as a correction for the following tax year.

It's never coded out in the next tax year as tax returns aren't done till the new tax year starts. It's always the one after that.

Interestingly HMRC agree the circumstances that it was not the pension provider's fault but have totally ignored their error, not even an implied apology, and it took about 4 months for them to reply and only then after I sent them a second letter.

I'm not so sure HMRC has made an error. Some information cannot fully be got until,the end of the tax year when there is more than once income source

Well the LITRG website mentioned earlier seems to imply otherwise but I wonder if it would be any use in my case asking for the tax to be written off owing to their misinformation!

I don't believe so. HMRC would only be at fault if they had information which they did not act upon in a timely manner. This hasn't happened here and usually doesn't apply for those doing Self Assessment.

Ainsley1

Jem will digest your post later today but after a quick look note that a wrote in error that it was for tax year 14/15 and should have written 13/14 and so I did need to send HMRC the underpayment for that year.

jem16

Ainsley1 wrote: »

Jem will digest your post later today but after a quick look note that a wrote in error that it was for tax year 14/15 and should have written 13/14 and so I did need to send HMRC the underpayment for that year.

I think you need to give some more details as to which tax year it was, when you actually did the SA and when you were asked for the repayment.

Ainsley1

Jem as per my last post it was for tax year 13/14, as has been my habit SA done after Christmas when other demands are at a minimum and the result of that showed up an underpayment from one pension provider. Clarification of the reason (mnth 1 basis) obtained in Jan from the provider which did not align with the coding notice info I had but by then tax payment virtually due so underpayment and minor adjustment ( insignificant amount) sent to HMRC. I was not asked for a repayment but as usual ensured tax account not in debit by the deadline of end of Jan.
Hope that clarifies but not sure if it is relevant to the problem I have with error in coding notice to me!

You do say HMRC are not at fault such as citing multiple incomes make it difficult etc and imply I could have had other options. I do not think that is the case (unless I did early SA and there are good reasons I do not that are not relevant). Although my pension is made up from several providers HMRC were aware (I told them in advance) what the income would be from the new provider and the others remained extant.

Ainsley1

...and must add I only get 1 payslip a year unless gross income changes significantly so no opportunity to notice mnth1 on it!! Must admit it mistifies me how it has been claimed that I should have been able to work out my tax situation but the experts (HMRC) cannot as it is complicated by several incomes when they have the same info as me (cos I told 'em). I note CAB and the LITRG seem to have raised other options as to how tax can be treated. I do not disagree with the tax calculation and what I owed but HMRC must surely be in error somewhere when they have all the info they need, tell my provider A and me B

Ainsley1

...so to conclude ( sorry about multiple posts -having IT issue) It is really now all water under the bridge but has maybe raised awareness through this forum and given a couple of useful links for others too.