HMRC Charging Excess Tax for State Pensioners

KJY_WV_Hants

I believe that HMRC are charging excess tax for State Pensioners.

Occupational Pensions, and any salaried employment whilst in receipt of pension income, are generally paid monthly and PAYE tax is assessed for each of the 12 x monthly payments (month 1 to month 12). All P60’s from these income sources correctly records the exact income received and the tax deducted throughout any/all income fluctuations.

This is NOT the same for State Pension taxation.

The DWP generally pays the State Pension once every 4 weeks, so 13 payments per year. The weekly rate of State Pension is reviewed annually and usually increased each April. When calculating the PAYE tax code, HMRC uses an annual income figure by multiplying the new weekly rate x 52 weeks (or weekly rate x 4 x 13 weeks), but this does NOT match the amount actually received in the tax year as explained below.

When pensions are paid, invariably the first payment in the new tax year is a combination of x weeks at the old rate and (4-x) weeks at the new rate. The day/date of the first payment will vary for each individual (based upon their date of birth and their NI code), so x can be 0, 1, 2 or 3. But no account is taken for this when calculating the correct figure for the PAYE coding.

A further inexplicable complication is that although the Government announces the Pension increases from April, the effective date is not aligned with the April 6th to March 5th tax year? For example, in the current tax year it was payable from the 14th April 2023?

A consequence of the above is that HMRC overestimates pension income and these overestimates are coded into other income sources and results in excess taxation.

 

Without more detail, I cannot confidently quantify this across the whole population of pensioners, but here is an example from my own experience, relating to the 2022-2023 tax year.

·      HMRC income estimate = 13 x 4 x £236.40 = 13 x £945.60 = £12,292.80.

·      I actually received the following 13 payments, noting that the first 2 payments in this tax year were less than HMRC’s estimate for the reasons detailed above: £917.04, £938.46, followed by 11 payments of £945.60. A total of £12,257.10.

·      In summary, my taxable income was overestimated by £35.70, so I paid £7.14 too much tax (basic rate of 20%). HMRC have disputed this, and have not recognised my actual payments and simply referenced the £12,292.80 computation.

·      Not a significant personal penalty, but HMRC are incorrectly collecting £millions from this error.

·      Not sure how many pensioners receive their payments every 4 weeks, but even if 50% of the 12.5 million pensioners are affected by this, by £3 per year, then HMRC will be collectively denying pensioners of £19 million every year. Surely this is a simple problem to solve correctly?

molerat

State pension is taxable on an accruals basis, when it is due rather than when it is paid, so your premise that HMRC are taxing it incorrectly is flawed and a common misconception. https://www.legislation.gov.uk/ukpga/2003/1/section/578

Dazed_and_C0nfused

KJY_WV_Hants said:

I believe that HMRC are charging excess tax for State Pensioners.

Occupational Pensions, and any salaried employment whilst in receipt of pension income, are generally paid monthly and PAYE tax is assessed for each of the 12 x monthly payments (month 1 to month 12). All P60’s from these income sources correctly records the exact income received and the tax deducted throughout any/all income fluctuations.

This is NOT the same for State Pension taxation.

The DWP generally pays the State Pension once every 4 weeks, so 13 payments per year. The weekly rate of State Pension is reviewed annually and usually increased each April. When calculating the PAYE tax code, HMRC uses an annual income figure by multiplying the new weekly rate x 52 weeks (or weekly rate x 4 x 13 weeks), but this does NOT match the amount actually received in the tax year as explained below.

When pensions are paid, invariably the first payment in the new tax year is a combination of x weeks at the old rate and (4-x) weeks at the new rate. The day/date of the first payment will vary for each individual (based upon their date of birth and their NI code), so x can be 0, 1, 2 or 3. But no account is taken for this when calculating the correct figure for the PAYE coding.

A further inexplicable complication is that although the Government announces the Pension increases from April, the effective date is not aligned with the April 6th to March 5th tax year? For example, in the current tax year it was payable from the 14th April 2023?

A consequence of the above is that HMRC overestimates pension income and these overestimates are coded into other income sources and results in excess taxation.

 

Without more detail, I cannot confidently quantify this across the whole population of pensioners, but here is an example from my own experience, relating to the 2022-2023 tax year.

·      HMRC income estimate = 13 x 4 x £236.40 = 13 x £945.60 = £12,292.80.

·      I actually received the following 13 payments, noting that the first 2 payments in this tax year were less than HMRC’s estimate for the reasons detailed above: £917.04, £938.46, followed by 11 payments of £945.60. A total of £12,257.10.

·      In summary, my taxable income was overestimated by £35.70, so I paid £7.14 too much tax (basic rate of 20%). HMRC have disputed this, and have not recognised my actual payments and simply referenced the £12,292.80 computation.

·      Not a significant personal penalty, but HMRC are incorrectly collecting £millions from this error.

·      Not sure how many pensioners receive their payments every 4 weeks, but even if 50% of the 12.5 million pensioners are affected by this, by £3 per year, then HMRC will be collectively denying pensioners of £19 million every year. Surely this is a simple problem to solve correctly?

So so wrong.

HMRC usually are proactive in ensuring you don't pay too much tax on State Pension, which as @molerat has explained is taxed slightly differently to most income.

If you're award was £236.40/week in 2022-23 and say £260.00/week in 2023-24 (£13,520 for 52 weeks) then the State Pension in your 2023-24 tax code would be calculated as follows,

1 week x £236.40 = £236.40
51 weeks x £260.00 = £13,260

Total State Pension included in 2023-24 tax code £13496

badmemory

D & C is correct.  It is (for once) not HMRCs fault.  They use the figures which the DWP notify them of.  But just remember to duck when we have a 53 week year because the DWP still use 52 weeks, well at least they did last time.  If you are on simple assessment please check their figures carefully as they haven't got mine right yet & they won't accept self assessment once they have decided you should be on simple assessment.