First year of your State Pension? Check your PAYE code

SilverE

When you get a state pension, HMRC work out a reduction to your PAYE code based on what DWP tell them, using their new "dynamic update" system. In the year your pension starts, DWP tell HMRC you are getting a full year's pension instead of a part-year. So HMRC's system takes too much off your tax code.

This happened on mine, they had reduced my code and claimed I had been underpaying tax. I then had some long phone conversations with HMRC staff and eventually a manager, and they have now corrected my code and are using the right figure for my pension. But this needed a specific update from them, it won't happen automatically in this new system.

Check your PAYE code calculation on HMRC's website to see what they are doing. If it's wrong, call them up and get them to use the right state pension figure, it can be done.

Dazed_and_confused

Not necessarily true.

This has cropped up on here from time to time and in the year you start to receive your state pension it can be necessary to include the annual pension amount in your code, but only in some situations.

This is where the tax code has to be issued on an emergency basis (otherwise known as week 1/month 1) and only applies from that point onwards, not backdated to the start of the tax year. So each time the code is used it takes into account the amount of state pension you are really receiving even though it looks odd in your tax code breakdown (you wouldn't be seen as underpaying in that situation though).

For example a months state pension is £600 and the annual amount is £7200. Your tax code is reduced by £7200 but it is only used from that point onwards, what happened earlier in the year is ignored (week 1/month 1 basis) so when you are paid that month the code has the effect of making you pay extra tax on £600 worth of state pension.

Dazed_and_confused

Just to add in the situation I refer to you assuming the tax code was correct before being altered to include the annual state pension amount then there shouldn't be any tax owed when the tax code is amended to include an annual state pension amount

SilverE

It's been a long story and I didn't give all the gory details. Yes, there was a Month 1 code, and that was fair, although when first put up on the website it wasn't shown as Month 1 so it appeared wrong at that point. They are now showing them with a suffix "X" - maybe my query/complaint helped prompt them to do so. It didn't help their efficiency to push people off paper coding notices which give proper details onto website notifications that don't, meaning they then have to deal with individual queries and send out individual letters to explain.

If it had been as simple as that there wouldn't have been a story, I wouldn't have been speaking with an HMRC manager. But the new "Dynamic Update" system has changed the scene. As explained by HMRC, It works on the full year figure given by DWP, and it doesn't allow for the period when there was no pension and so assumes the lower PAYE code should have been in force then: effectively it ignores the Month 1 rationale. So when it scans the data it gets from the RTI (real time info) payroll submissions it decides there has been an underpayment in that period, and it calculates a new Month 1 code intended to collect that supposed underpayment over the remaining months of the year. That's wrong, and the HMRC people I spoke to agreed. Maybe they will make their system smarter in the fullness of time, it's not actually difficult.

For me, it was only one month out so not a major issue. But another feature of this new system is that when it works out the revised Month 1 code it is trying to collect the full underpayment within the current tax year, while the old basis allowed the earlier months' difference to roll over to next year. So if the same happens to someone whose pension starts in January, it will decide that there has been getting on for £1000 of tax underpaid, and it will all need to be collected in Feb and March, so quite possibly it will try to issue a large negative Month 1 code (a K suffix if I remember rightly). This will cause a real fright. And not just for new pensioners: any code reduction late in the year will run into this. It's going to massively reduce the benefit of a Month 1 code.

cbsexec

Yes happened to me as well. Took a few calls to HMRC. I was told I had a large underpayment because the system assumed I had a full years pension instead of only a few months.

Dazed_and_confused

Fair enough, clearly different to the things people have posted in the past!

brewerdave

This post fills me with dread - both the OH and I have deferred our state pensions. Sounds like we need to plan to take them as near to the start of a tax year as possible - or be prepared to get a month with no company pension payment!!

SilverE

You probably would get away with starting in February, given that DWP need to tell HMRC about it, HMRC then need to get the initial Month 1 code out (which will be OK), and that won't hit until March's company pension payroll run, so there won't be time for them to run their "dynamic update" and mess it all up before year end. And you should then be all clear for the next year, it won't need a Month 1 code at all. In fact that sounds like the best time to do it.

badmemory

brewerdave wrote: »

or be prepared to get a month with no company pension payment!!

For those who may really worry about this, the maximum that can be taken in tax is 50% of the payment. So it is bad but not as bad as it could have been!

brewerdave

badmemory wrote: »

For those who may really worry about this, the maximum that can be taken in tax is 50% of the payment. So it is bad but not as bad as it could have been!

...is that in law ???

xylophone

https://www.cipp.org.uk/news-publications/news/50percentreglimittaxcodes.html