Pension payment not taxed when still employed

Weave

Hi

A friend of mine started to receive a small pension last year when her husband passed away. She is also employed but earns just below her personal allowance. Adding her salary to her pension means she is over the personal allowance but no tax has been deducted on the pension P60. She has not been sent a request for a tax return.

For 2018-19 the figures are:
Tax code - 1185L
Employment taxable pay - £11,500
Tax deducted by employer - £0
Pension earnings - £2528.70
Tax deducted from pension - £0

Total income £14,028.70
Total tax paid £0

I believe she needs to inform HMRC she has unpaid tax due of around £435 and needs to do a tax return every year from now on. Can anyone confirm this is correct as I don't want to give her the wrong advice?

Another thought is she could ask the pension provider to deduct tax but then she would pay more tax than is due this year with the increased tax allowance so this doesn't really work either.

Anyone have experience of this scenario?

Many thanks.

Pennywise

Yes, she needs to tell HMRC, but no, not necessarily does it mean she must do a SA return each year. HMRC can deal with it via PAYE codes as long as she keeps them updated with her income levels - she can do that by phone or online via her personal tax account.

agrinnall

As Pennywise says, it should be dealt with by tax codes. I started to get a DB pension last year while still employed, and in the first year there was a bit of fiddling around with codes to get the correct tax paid, but now we're in the new tax year my personal allowance is applied against my salary and I have a BR code on my pension payments.

Weave

Thanks both. I will get her registered for an online tax account and see if we can get her tax code to handle this.

Thanks for the advice.

xylophone

Has she checked her personal tax account?

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

Weave

xylophone wrote: »

Has she checked her personal tax account?

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

That's my next step - she is not yet registered so I'll do that with her and take it from there.

Thanks.

nick74

She really needs to check exactly what type of pension it is. My mum inherited two small pensions when my stepfather died. I noticed that neither were being taxed, despite her using up her personal allowance with other income. After being passed backwards and forwards between HMRC and the pension providers it was established that both of the pensions were classed as 'drawdown funds', and as her husband died before he was 75 my mum is correctly not paying income tax on either of them.

https://www.gov.uk/tax-on-pension-death-benefits

Weave

Great shout nick74. I think you may have hit the nail on the head there. I will dig a bit deeper but I'm confident this pension is classed as 'drawndown funds' and her husband died before he was 75.

Thank you very much. You have saved us a load of agro and a possible £400+ tax mistake.

nick74

Hopefully so. Its worth checking with the pension provider just to make sure this definitely is the case and its not just that tax has been missed in error.

My stepdad sadly died only a couple of months after the new rules came into force in April 2015 and it was this first time I'd come across inherited pension drawdown income being free of tax in this way.

xylophone

Make sure that it is not a widow's pension from an occupational scheme - this is definitely taxable.