State pension: incorrect tax code

ashfor

I think that HMRC has been calculating my tax code incorrectly for several years.  If I'm right (and I'd appreciate confirmation of my reasoning), this issue affects thousands of state pensioners.

Every year, DWP informs HMRC the annual rate of state pension for each individual and HMRC uses this to calculate the tax code.  The issue arises because HMRC assumes (wrongly) that the annual rate of pension is the amount actually paid.  State pensions are paid 4-weekly at one-thirteenth of the annual rate and the annual pension increase takes effect from a date in April that is later than the start of the tax year.

In my case, the annual increase took effect from 12th April and the first payment was on 18th April.  That payment was for the previous 28 days and consisted of 21 days at the previous year's rate and 7 days at the new year's rate, so was less than one-thirteenth of the new annual rate.

The effect of this is that the first state pension payment in the tax year is always less than the following payments and the total actually paid in a tax year is always less than the annual rate.

In my particular case, the difference between what I actually receive in the tax year and what HMRC assume I receive is £50, so £50 of my other income that should be tax-free is wrongly taxed at the basic rate.

I appreciate that the extra tax is small in monetary terms but there's the principle that HMRC should collect the correct amount of tax and not use a flawed calculation that's to the detriment of the tax payer.

If I've misunderstood something here, please do say.  If I'm correct, I wonder how best to persuade HMRC to correct the calculation, not only for me but also for the thousands of others who are probably affected.

Dazed_and_C0nfused

State Pension is taxed slightly differently to other income, it's the entitlement not what has been paid/received which counts.

Typically you should be taxed on 1 week at the old rate and 51 weeks at the new rate.

ashfor

Thank you for that comment.  Not that I'm doubting you but can you refer me to any official statement that it's the entitlement that counts, not the actual payments?  In practice, the state pension is tax-free but reduces the personal allowance so that more of any other income is taxed.

QrizB

ashfor said:

In practice, the state pension is tax-free but reduces the personal allowance so that more of any other income is taxed.

The state pension is not tax-free, it's taxable income. But it's paid gross of tax, unlike most other forms of income that are paid net (eg. via PAYE or similar).

p00hsticks

ashfor said:

Thank you for that comment.  Not that I'm doubting you but can you refer me to any official statement that it's the entitlement that counts, not the actual payments?  

Here you go.
EIM75020 - The taxation of pension income: pension payments made in arrears or in advance - HMRC internal manual - GOV.UK (www.gov.uk)

squirrelpie

ashfor said:

Thank you for that comment.  Not that I'm doubting you but can you refer me to any official statement that it's the entitlement that counts, not the actual payments?  In practice, the state pension is tax-free but reduces the personal allowance so that more of any other income is taxed.

https://www.legislation.gov.uk/ukpga/2003/1/part/9/chapter/5 section 578

Dazed_and_C0nfused

Try this,

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim75700

ashfor

Thanks for both those references.  I may be seen as argumentative (I hope not!) but both references seem to cover situations when an entitlement is paid early or late and thus crosses a tax year boundary, but is nevertheless paid.

EIM75020 says "the amount of the pension income charged to tax is the amount that the pensioner is entitled to in the tax year, regardless of what amount is actually paid" and my point is that the pensioner is never "entitled" to the annual rate; she is entitled to what is actually paid.

Section 578 says "the taxable pension income for a tax year is the full amount of the pension, benefit or allowance accruing in that year irrespective of when any amount is actually paid".  I'm unsure of the definition of "accruing" here but could it not be argued that the "missing" amount never accrues and is never "actually paid"? 

molerat

State pension is due, and taxable, on a weekly basis.  If your pension day is a Tuesday and paid 4 weekly with a payment on April 11th 2023 you received the due amounts from 21st March, 28th March, 4th April and 11th April.  Only one of those amounts was taxable in the 2023-24 tax year, the first 3 were in 2022-23.

Dazed_and_C0nfused

ashfor said:

Thanks for both those references.  I may be seen as argumentative (I hope not!) but both references seem to cover situations when an entitlement is paid early or late and thus crosses a tax year boundary, but is nevertheless paid.

EIM75020 says "the amount of the pension income charged to tax is the amount that the pensioner is entitled to in the tax year, regardless of what amount is actually paid" and my point is that the pensioner is never "entitled" to the annual rate; she is entitled to what is actually paid.

Section 578 says "the taxable pension income for a tax year is the full amount of the pension, benefit or allowance accruing in that year irrespective of when any amount is actually paid".  I'm unsure of the definition of "accruing" here but could it not be argued that the "missing" amount never accrues and is never "actually paid"? 

No, effectively it's what your State Pension entitlement is.

So ignoring the first and final years HMRC will always see it as 52 weeks (1+51) irrespective of how your payment schedule from DWP happens to fall.

badmemory

In the same way that they tax an employee based on info from the employer.  HMRC tax a state pensioner on the amount the DWP tell them for the year.  Unfortunately the DWP notify them of 52 x the new weekly amount rather than 1 x the old amount & 51 x the new.  They also tell them the 52 week figure in a 53 week year.  I have been telling them that the DWP are doing this for the last 9 years, mostly in writing but it seems to have little effect.