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

garmeg

Dazed_and_C0nfused said:

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.

Standard Life is based in Edinburgh, Scotland - probably a coincidence?

A SD1 code would be used for a (Scottish) higher rate taxpayer, so they must have been advised by somebody.

Dazed_and_C0nfused

The op originally posted SD0 (21%)  has now amended to SD1 (41%).

I wonder if the actual issue is that the pension company calculated the final payslip on 21% tax when HMRC had issued a 41% (SD1) code?

It would be useful if the op could clarify this aspect.  Particularly what was on the pay advice issued by the pension payer.

Whatever else though SD0 or SD1 would not be used on the first taxable payment.

angeleyes99

Hi again, both! I wrote down everything that HMRC told me, as I knew I’d need the info for when I contacted Standard Life. The guy quite categorically said the 75% taxable part of the pension pot should have been taxed using code SD1, but Standard Life had used 1250L for the first part payment and SD0 for the second part which came a couple of weeks later. I didn’t change anything from SD1 to SD0 or vice versa.
If it makes any difference my salary was approx 37k annually and I was told by my company pension adviser that taking a lump sum COULD potentially push me into a higher tax bracket but that it would be resolved at the end of the tax year.

Dazed_and_C0nfused

Then you need to contact HMRC again and ask under what tax legislation/guidance the pension provider should have used a Scottish prefix tax code not issued by HMRC (the first taxable payment is made before HMRC get involved).

As far as I'm aware there is no such provision.  

But irrespective of that if they were meant to use the SD0 (21%) tax code for the second payment then the refund they made was correct as tax normally works on a cumulative basis.  Unless the tax code was issued on a non cumulative basis i.e. SD0X or SD0 wk1/mth1.

In this instance I think HMRC seem to be trying to unfairly apportion some sort of blame/fault to the pension company.

angeleyes99

I’m starting to get the same feeling. So have you any insight into how this could have happened, are all the calculations correct, and if so does that mean that I alone am responsible? 
Im very grateful for your input.

angeleyes99

garmeg said:

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?

So according to your calculations, Garmeg, I have been overpaid £4943. So that’s a mistake made by Standard Life and, if so, then surely they ARE responsible for this situation? They didn’t OVERPAY me as such, they UNDER-TAXED me....

Dazed_and_C0nfused

It sounds very much that when the pension company made the first (taxable) payment they operated the correct tax code for this situation.

HMRC would normally review your tax codes when they get notification of the first pension payment (like they would a new job) and issue the pension company with a tax code.  In this case it looks like they issued a SD0 (21%) tax code on a cumulative basis and the pension company acted on that when they made the second (taxable) payment.

Without knowing more information about what the pension company reported to HMRC it is impossible to know if the SD0 tax code was appropriate or not (based on the information held at that moment in time).

I think the remaining questions are,

1.  Why were two taxable payments made by the pension company?  At face value that isn't at all unusual but you seem to suggest otherwise.

2.  Why do HMRC believe the pension company should have used an S prefix tax code on the first (taxable) payment?

As far as the calculation goes why do you think it might be wrong?  Have you compared the figures in the calculation to what you were paid?

Assuming the figures are correct then you have a bill to pay, having had the benefit of paying less tax at the time.  Think of it as an interest free loan.

dunstonh

angeleyes99 said:

garmeg said:

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?

So according to your calculations, Garmeg, I have been overpaid £4943. So that’s a mistake made by Standard Life and, if so, then surely they ARE responsible for this situation?

whilst you are hunting for reasons why something happened and you seem to have suffered someone at HMRC trying to pass the buck, you do need to be prepared for the fact SL will not cover your tax bill.      
Whether there was a clerical error or not, the end position was always going to be one that you ended up at.  It may have been earlier or later but this is tax you would have always paid.  If there is a clerical error by SL, then you may good a goodwill gesture of a hundred or so quid.    However, the risk warnings on drawdown do tend to warn you that the tax you initially pay may not be correct and you should check it.  Self-assessment means you are responsible for your tax.  Mistakes that overpay you do not give you entitlement to keep that money or make someone else responsible.  There are some exceptions to that but its unlikely to apply here.

Did you have any other income in that tax year?  

angeleyes99

Ok thanks for all your input, folks. I’m not trying to wriggle out of paying this, I just wanted to establish if an error had been made and, if so, it might help in any negotiations with HMRC over ‘time to pay’, given that I’m living on a third of the income I was back then. I’ll let you know how my calls go!
Much appreciated input though, thanks again 🙂

Thrugelmir

angeleyes99 said:

If it makes any difference my salary was approx 37k annually and I was told by my company pension adviser that taking a lump sum COULD potentially push me into a higher tax bracket but that it would be resolved at the end of the tax year.

The company pension adviser isn't there to provide you with detailed tax advice. At the time the advisor would have had no idea what your other taxable earnings amounted to. If your main employment tax code wasn't amended then would appear it you underpaid tax whilst still employed. In such situations the onus is on you as the taxpayer to monitor the situation.