Pension provider messed up the tax when I cashed in Pension Pot

angeleyes99

Hoping someone can advise me on this worrying issue. I cashed in a DC pension in April / May 2019, to pay off my outstanding debts, as I was approaching retirement in September 2020 and wanted to clear all unnecessary outgoings.  I also had another pension with a different company which would supplement my State Pension. On my final working day I came home to a tax demand from HMRC for £5200 for underpaid tax in year 2019/2020. To cut a long story short, and after several lengthy discussions with HMRC over the last couple of months of last year, it transpires that my pension provider messed up on two counts, tax-wise.
Instead of paying my pension pot to me in two bank transfers (one being the 25% tax free payment and the second payment being the remainder minus tax), they paid me in three payments. First was correct (the 25% tax free) but the remainder came in two separate payments. The third and last  payment also showed a tax refund of £2800. It turns out that a) my pension provider taxed the 75% of my pot at the wrong tax code AND b) they made an error when including a tax refund of £2800 in my last payment. Of course this was nearly 2 years ago and I am now retired and on a much lower income than when I was working. HMRC, who were exceptionally helpful (!!), say the £5200 ultimately has to be paid but understand that the pension provider is at fault here. Although they say I am ultimately liable for the tax bill, they also say the pension provider has to accept responsibility for messing the payments / tax up and for the fact they have now placed me in a ‘position of hardship’ if I’m forced to pay the £5200.
As I gear myself up to phoning the pension provider this week to discuss the issue, I wondered if anyone had any advice on the legalities of it all so I don’t go steaming in uninformed.

Dazed_and_C0nfused

Why do you think the tax refund is the pension providers mistake?

When they make the first (taxable) pension payment they should use the emergency tax code on a non cumulative basis.

To get a tax refund they must have then used a cumulative tax code.

Are you saying HMRC didn't issue a cumulative tax code and the pension provide just decided to operate a cumulative tax code themselves?

What questions did you ask when the second taxable payment was inflated by the tax refund?

xylophone

Do you have a P60 from the pension company  for the tax year in which the payment was made?
Do you have a P60 from your employer for the same tax year?
And records of any other taxable income for the year?
Did you make any kind of check on the amount of tax due for the year?

angeleyes99

Thank you for your speedy response. HMRC have told me the error was on Standard Life’s part. They say the 75% taxable part of my pot should have been taxed under code SD1, (I’m in Scotland), and should have been made in one lump sum payment. However, it was paid in two parts, a month between the two payments, and was taxed using two different codes. The first payment was taxed using tax code 1250L and the second payment taxed using tax code SD0 and included a tax rebate. On adding up all the ‘gross’ payments of the tax free payment plus the two other payments making up the taxable 75%, the gross total was exactly correct. It appears they underpaid me with the first of the two payments (which was also taxed using the incorrect code) and tried to correct it a month later with the second payment (which included a tax rebate I was not entitled to. I can give you the figures if that helps.
I didn’t ask any questions as, on checking at the time, the gross amounts totalled up to the exact figure of my pension pot. I had / have very little experience of tax codes so would not have been aware that an error had been made. I may have presumed that the refund was part of the tax I paid in the second part being returned as I’d overpaid tax. 
This is why I’m here asking for advice. I think most people would assume that a pension provider would have carried out correct calculations when processing a pension and, as long as the gross payments are accurate, would not think to query a tax refund.

angeleyes99

Thank you for your response, Xylophone. I do indeed keep all records and have P60’s for all my income from year 2019/2020, including the pension provider. I’m not sure what you mean by ‘did I do any checks on the amount of tax due for the year’...what kind of checks? I would have presumed that if anything was amiss with my tax affairs for 2019/2020 I would have heard from HMRC soon after April 2020. The first I knew of any discrepancy was on 30th September 2020 when the demand arrived from HMRC. PS I don’t and have never done Tax Self Assessments. Hope this helps.

Marcon

Best bet for help (free, impartial and expert): https://www.pensionsadvisoryservice.org.uk/pension-problems

angeleyes99

Thank you, Marcon 🙂

Dazed_and_C0nfused

angeleyes99 said:

Thank you for your speedy response. HMRC have told me the error was on Standard Life’s part. They say the 75% taxable part of my pot should have been taxed under code SD1, (I’m in Scotland), and should have been made in one lump sum payment. However, it was paid in two parts, a month between the two payments, and was taxed using two different codes. The first payment was taxed using tax code 1250L and the second payment taxed using tax code SD0 and included a tax rebate. On adding up all the ‘gross’ payments of the tax free payment plus the two other payments making up the taxable 75%, the gross total was exactly correct. It appears they underpaid me with the first of the two payments (which was also taxed using the incorrect code) and tried to correct it a month later with the second payment (which included a tax rebate I was not entitled to. I can give you the figures if that helps.
I didn’t ask any questions as, on checking at the time, the gross amounts totalled up to the exact figure of my pension pot. I had / have very little experience of tax codes so would not have been aware that an error had been made. I may have presumed that the refund was part of the tax I paid in the second part being returned as I’d overpaid tax. 
This is why I’m here asking for advice. I think most people would assume that a pension provider would have carried out correct calculations when processing a pension and, as long as the gross payments are accurate, would not think to query a tax refund.

Tax is all about the detail and some of those don't make sense.  Or there are important bits you haven't yet disclosed.

No employer or pension provider can use a Scottish tax code unless it has been issued by HMRC or is on a P45 from a previous employment or pension.

If this was your first taxable pension payment from this pot then the pension company is instructed to use the emergency tax code of 1250L on a non cumulative basis.

It is only after they have reported the first taxable payment that HMRC would calculate and issue them with a tax code.

This could be SD0 and if that was on a cumulative basis it is quite possible a refund could ensure.

Why do HMRC think only one payment should have been made? 

And September seems slightly ahead of expectations according to gov.uk

https://www.gov.uk/tax-overpayments-and-underpayments

angeleyes99

You see this is where I get utterly confused. I really don’t understand how all this works and I certainly haven’t withheld any information intentionally. I’ll give you the number, round up to nearest pound for ease. 
Pension Pot = £32929
25% tax free = £8232 (this was the first payment I received).
75% taxable balance = £32929-£8232 = £24697
HMRC say I should have received the £24697 minus tax using code SD1, in one final payment.
However the second payment came through with a gross of £21767 minus tax of £8076 using code 1250L, resulting in a net payment of £13691.
Then 2 or 3 weeks later I received another payment, as below:
Gross £2935, a tax refund of £2888, resulting in a payment of £5824.

garmeg

angeleyes99 said:

You see this is where I get utterly confused. I really don’t understand how all this works and I certainly haven’t withheld any information intentionally. I’ll give you the number, round up to nearest pound for ease. 
Pension Pot = £32929
25% tax free = £8232 (this was the first payment I received).
75% taxable balance = £32929-£8232 = £24697
HMRC say I should have received the £24697 minus tax using code SD1, in one final payment.
However the second payment came through with a gross of £21767 minus tax of £8076 using code 1250L, resulting in a net payment of £13691.
Then 2 or 3 weeks later I received another payment, as below:
Gross £2935, a tax refund of £2888, resulting in a payment of £5824.

Assuming SD1 is correct, what you should have received is ...
£24,697 minus SD1 (41%) tax of £10,126 = £14,571 net

What you received (adding the two actual cashflows together) was 
£24,702 - £5,188 (tax) = £19,514 net

(The gross amount is £5 more, maybe £5 late payment interest)

The difference in the two net payments is £4,943 - you received this amount too much.

So there is a tax underpayment here of £4,943.

If they want £5,200 off you you must owe further tax of £257 unless the extra is interest plus penalties?

Dazed_and_C0nfused

So the pension payer has used the correct tax code for the first taxable pension payment.

What you need to establish is how the pension company for the SD0 code.

I am reasonably confident HMRC would have sent it to them.

What is very odd is HMRC claiming a Scottish prefix tax code should have been used on the first payment.  That simply isn't possible with the current payroll procedures pension payers (and employers) have to follow.