Taxation in the first year of state pension

Nursery23

I am posting this to help anyone else avoid a pitfall I discovered with the way the state pension is taxed. My state pension payments started in the middle of the 2017-2018 tax year, and I actually received 9 x 4 weekly payments. At the end of the tax year there were 3 weeks unpaid, which arrived in a bank transfer on 11 April 2018. What I did not realise was that tax is due on the amount paid plus the unpaid amount still sitting in the Government's bank at 5 April 2018. I had drawn down an amount from my personal pension which brought the total actual received funds to exactly my personal allowance. When I sought to recover the overpaid tax on my drawdown, HMRC withheld the tax on the 3 weeks pension I had not been paid, effectively reducing my personal allowance for the year by the amount of 3 weeks pension. After an unsuccessful tussle with HMRC they have pointed out that the following pensions/benefits are treated in this way:-

the state pension,
graduated retirement benefit,
industrial death benefit,
widowed mother’s allowance,
widowed parent’s allowance, and
widow’s pension.

So if you receive these payments you will be taxed on the accrued payments not received, not just on the amount received. Felt a bit like giving the government a lifetime interest free loan of the tax paid on the accrued but unpaid amount. For a first year pension recipient with a first qualifying week in March, it would be possible to pay income tax in the first year even without receiving a single payment!

The relevant legislation is in ITEPA 2003 , Part 9, Chapter 5, paragraphs 577-579.

speedyrite

I suppose it's related to the fact that SP (and presumably those other benefits listed) is paid 4 weekly in arrears nowadays? My older relatives, who have been on SP for many years, still get SP paid weekly in advance (thankfully not in cash at the post office though!)

squirrelpie

I suppose it's related to the fact that SP (and presumably those other benefits listed) is paid 4 weekly in arrears nowadays?

Sounds like yet another reason to choose to have it paid weekly to me! It's only paid 4 weekly if you let them.

speedyrite

squirrelpie wrote: »

Sounds like yet another reason to choose to have it paid weekly to me! It's only paid 4 weekly if you let them.

Is weekly payment of SP still available as an option to choose? I didn't think it was, but I'm often wrong about things!

Mnd

Why would it make a difference to what tax is payable.my pension I'd due to be paid Jan 6th 2020..it's approx 13 weeks from then to April 5th...at £200. = 2600 taxable.
If I'm paid that weekly or 4 weekly surely it's still the same amount of money, or am I missing the point somewhere?

roddydogs

Monthly only from now?

greenglide

Monthly only from now?

There is not an option for "monthly", only weekly, fortnightly(under certain circumstances), four weekly (the default), thirteen weekly and annual payments.


Monthly payments would require legislation changes (it is defined in law as a weekly payment and the entitlement is always defined as a weekly amount) and the changes to the IT would be horrendous. There are also be knock on changes with other benefits (Pension Credit etc).


The tax implications in the first part year are trivial and do sort themselves out but I have never understood why they didn't get it right in the first place! The relation between DWP and Inland Revenue (as was) was always odd!

brewerdave

So my 4 weekly payment of SP will be paid on 3rd April. Does that mean that there will be tax due on an extra 2 days SP (accrued in tax year 2018/9) or a full week or nothing??

badmemory

The next payment would be due on the 10th April which is in the next tax year, it only goes in full weeks. You need to keep your eye on what they say is due as the DWP seem to be incapable of notifying HMRC of the correct amount. The first week of the new tax year is at the old rate and the rest of the year at the new.


I am hoping that at the end of this tax year the DWP act as normal & do 52 times my weekly rate, as for me it is a 53 week year & HMRC have stopped me doing SA because obviously they know all about my savings interest from the banks. They only calculated £250 instead of almost £800. They didn't want to correct it either.



But we should always remember that when they calculate it for us it is OUR responsibility to ensure it is correct. We should also remember that they can now charge penalties for incorrect info even if it makes no difference to the tax due.

badmemory

Nursery23 wrote: »

For a first year pension recipient with a first qualifying week in March, it would be possible to pay income tax in the first year even without receiving a single payment!

I got billed for the first 2 weeks when I received my first 4 weeks on 15th April. 2 weeks in the old tax year 2 in the new. DWP calculated that wrong too.

xylophone

Is weekly payment of SP still available as an option to choose? I didn't think it was, but I'm often wrong about things!

Yes it is but you must specifically request it.

See BRIEFING PAPER
Number CBP-260, 27 October 2017
State Pension payment arrangements


The timing of State Pension payments for people reaching State Pension age on or after 6 April 2016 was provided for in the Pensions Act 2014 (Consequential, Supplementary and Incidental Amendments) Order 2015 (SI 2015/1985) (article 9). This inserted new regulations 22CA and 22DA into the existing claims and payments regulations:
17 Source: DWP
18 HC Deb 21 February 1940 cc 1366-1367
19 Pensions Act 2014; Library Briefing Paper, SN0-06525 The new State Pension - background (August 2016)
20 PQ 43605 5 September 2016
10 State Pension payment arrangements
• Regulation 22CA specifies that the new State Pension is paid in arrears, at intervals of one week, two weeks, four weeks, or 13 weeks, if the beneficiary agrees.