Pension payment;..too much tax?

The_Big_Bamboo

I retired 7th November 2016 but due to admin delays I only received my first (private) pension payment on 1st April 2017.

This payment was 1 lump-sum that constituted the pension back-pay from 7th Nov’16 to 31st March’17 plus 1 months pension (paid in advance) from 1st April.

The pension company’s’ usual policy is to pay the pension in advance on the 1st of each month.

However, the entire lump sum I received (i.e. the arrears and all of Aprils’ pay) have been made during ‘Tax month 12’ and I have been taxed at 40% on the entire gross amount.

I will certainly be liable for 40% tax on any income up to the 5th April 2017, but will I be liable to pay 40% tax on my entire April monthly pension just because it was paid a few days prior to the start of the new tax year?

As a retiree I expect my entire income to be just below the 40% tax threshold in 2017/18 and as such my pension payment from 6th April – 30th April should be taxed at 20%,…not the 40% that I’ve paid.

I’ve queried this situation with the pension company (they’ll only correspond by letter) and their response to my initial query has taken 30 days!...they’ve simply stated that the entire payment came under ‘tax month 12’ and I’m liable for tax accordingly.

Can I claim via HMRC?.... It seems a little unfair that because April’s pension payment straddles the new ‘tax year’ I’m stuck with paying 40% tax on the entire month ;...or am I barking up the wrong tree?

All replies gratefully received.

molerat

Tax is due when the payment is made so has been taxed accordingly and correctly, there is nothing to claim back.

xylophone

I will certainly be liable for 40% tax on any income up to the 5th April 2017, but will I be liable to pay 40% tax on my entire April monthly pension just because it was paid a few days prior to the start of the new tax

The arrears were due in the tax year 2016-17 so taxable in that tax year and the "payment in advance" was paid in the tax year 2016-17 so is taxable in that year.

In our scheme, (which seems to operate like yours), pensions in payment are paid monthly in advance on the first of each month or the first working day thereafter if the first is on a weekend or Bank Holiday.

The tax deducted is at the rate for the relevant tax year.


Your first pension payment for the tax year 2017-18 will be the payment due today/tomorrow.

Have you received a Notice of Coding from HMRC for the tax year 2017-18?

xylophone

https://www.gov.uk/personal-tax-account

Have you registered?

sevenhills

I will be getting a one off pension payment, and I expect that I will pay too much tax. I have been told to register online, and fill out a online form, or download and print a P55 form, to claim back the tax, which can take up to 30 days.

Linton

The_Big_Bamboo wrote: »

However, the entire lump sum I received (i.e. the arrears and all of Aprils’ pay) have been made during ‘Tax month 12’ and I have been taxed at 40% on the entire gross amount.

.......

All replies gratefully received.

Pension payments are taxed under PAYE. PAYE is a simple system that works fine for most people who have one job and steady earnings over a relatively lengthy time period, but not so well for people with multiple incomes and for people who receive a new one-off payment in a tax year. The way it works is that:

1) The employer taxes each payment according to the taxcode received from HMRC. Until they receive the taxcode the employer has no choice but deduct tax according to default parameters specified by HMRC.
2) HMRC dont know about a new "employment" until notified by the "employer" that a payment has been made. At that point they can issue a tax code.
3) For most people that works fine because PAYE ensures that any excess taken off in the first month is refunded later in the year when the tax code is received.
4) But if you only ever receive 1 payment or if the new tax code doesnt arrive before the last payment in the tax year then you wont automatically get a refund through PAYE.
5)This should eventually be sorted out when HMRC process the tax year accounts after April 5th. However you can speed up the refund by contacting HMRC directly. There is also a form specifically designed to do this for people drawing pensions for the first time - see here.

The_Big_Bamboo

molerat wrote: »

Tax is due when the payment is made so has been taxed accordingly and correctly, there is nothing to claim back.

Thanks for the reply.:)

Are you inferring, for example, that had my entire pension back pay (from 7th November 2016) been paid today (1st May 2017) it would not have counted as part of my 2016/17 income?

It seems remarkably generous if HMRC viewed payments in arrears in that way,… especially if it was someone like me who has dropped from 40% tax last year, down to 20% tax this year.

The_Big_Bamboo

xylophone wrote: »

The arrears were due in the tax year 2016-17 so taxable in that tax year and the "payment in advance" was paid in the tax year 2016-17 so is taxable in that year.

In our scheme, (which seems to operate like yours), pensions in payment are paid monthly in advance on the first of each month or the first working day thereafter if the first is on a weekend or Bank Holiday.

The tax deducted is at the rate for the relevant tax year.


Your first pension payment for the tax year 2017-18 will be the payment due today/tomorrow.

Have you received a Notice of Coding from HMRC for the tax year 2017-18?

Thanks for that; :T
…it’s a fair chunk of cash (from 6th – 30th April) that I hoped would only attract 20% tax, not 40% tax,… but hey ho. I guess for someone (paid in advance on the 1st of the month) going from 20% tax to 40% in the new tax year, then it would work in their favour.

I am registered with HMRC and I actually spoke to an advisor on April 15th. She was unable to answer the specific question and indeed the tax/income figures she accessed were very much at odds with the personal info that I could access online through my ‘personal-tax-account’ WebPages. She reckoned the info she could access and the info available to me through my ‘personal-tax-account’ are held on separate databases and were not always in sync with each other,...which was a little disappointing to say the least.

I haven’t received my notice of coding yet.

The_Big_Bamboo

Linton wrote: »

Pension payments are taxed under PAYE. PAYE is a simple system that works fine for most people who have one job and steady earnings over a relatively lengthy time period, but not so well for people with multiple incomes and for people who receive a new one-off payment in a tax year. The way it works is that:

1) The employer taxes each payment according to the taxcode received from HMRC. Until they receive the taxcode the employer has no choice but deduct tax according to default parameters specified by HMRC.
2) HMRC dont know about a new "employment" until notified by the "employer" that a payment has been made. At that point they can issue a tax code.
3) For most people that works fine because PAYE ensures that any excess taken off in the first month is refunded later in the year when the tax code is received.
4) But if you only ever receive 1 payment or if the new tax code doesnt arrive before the last payment in the tax year then you wont automatically get a refund through PAYE.
5)This should eventually be sorted out when HMRC process the tax year accounts after April 5th. However you can speed up the refund by contacting HMRC directly. There is also a form specifically designed to do this for people drawing pensions for the first time - see here.

Many thanks for the info/link.:)

I will be due a sizeable tax rebate because the lump sum payment was taxed at 40% and did not take into account the remainder of my ‘personal tax allowance’ from 7th Nov’16 – 5th April’17.

I’ll await my P800/rebate from HMRC,…hopefully!