Tax on state pension in first year - again!

polar_pig

I submitted my SA online earlier this month and HMRC have sent a letter stating they have changed the SP figure (increased by one week of pension income) for the year based on their (presumably DWP provided) records. Consequently they have  increased the tax due by Jan 31st (also increasing the tax on account for next year). The incremental tax increase is 40% of the weekly pension amount, 20% on the pension itself plus 20% due to moving an equivalent amount of savings interest from the 0% tax starting rate to 20% tax basic rate.

I understand that state pension (unlike other income sources) is taxed on an entitlement basis (rather than payments) on *completed* number of weeks from SPA to 5th April (inclusive dates). Mine is X weeks plus 6 days. So, my SA is based on X weeks. HMRC have corrected it to X+1 weeks. 

My figure exactly matches the estimated SP from the tax code notice provided by HMRC earlier in the year. Furthermore this matches the best explanation I've seen (David Heaton in the last post here)... 

https://www.accountingweb.co.uk/any-answers/state-pension-1st-year-what-figure-to-use 

At this late stage I'm probably going to have to pay the increased tax to possibly be resolved later, but what is the correct figure and should I challenge it?

Dazed_and_C0nfused

polar_pig said:

I submitted my SA online earlier this month and HMRC have sent a letter stating they have changed the SP figure (increased by one week of pension income) for the year based on their (presumably DWP provided) records. Consequently they have  increased the tax due by Jan 31st (also increasing the tax on account for next year). The incremental tax increase is 40% of the weekly pension amount, 20% on the pension itself plus 20% due to moving an equivalent amount of savings interest from the 0% tax starting rate to 20% tax basic rate.

I understand that state pension (unlike other income sources) is taxed on an entitlement basis (rather than payments) on *completed* number of weeks from SPA to 5th April (inclusive dates). Mine is X weeks plus 6 days. So, my SA is based on X weeks. HMRC have corrected it to X+1 weeks. 

My figure exactly matches the estimated SP from the tax code notice provided by HMRC earlier in the year. Furthermore this matches the best explanation I've seen (David Heaton in the last post here)... 

https://www.accountingweb.co.uk/any-answers/state-pension-1st-year-what-figure-to-use 

At this late stage I'm probably going to have to pay the increased tax to possibly be resolved later, but what is the correct figure and should I challenge it?

What date did your State Pension start on?

You may find (parts of) this a useful read.

https://www.macfarlanes.com/insights/102kqp0/need-to-know-amending-self-assessment-tax-returns#:~:text=You may have to pay,to self-correct their return.

polar_pig

Many thanks for your reply. I'd rather not put my actual birthday on a public forum.

I've counted the days, my birthday being day 1 and the last day being 5th April 2025. I've worked this out in Excel and using pen and paper to get the same answer. It definitely comes out as X weeks plus 6 days. So, X+1 weeks would include 6th April 2025 in the following tax year 25/26.

I assume that DWP would have provided the data for both my earlier Tax Code Notification (X weeks) and HMRC's correction to my SA (X+1 weeks). I can't think of any reason for the difference.

Thanks for the link to HMRC powers to correct the SA. That's why I'd rather query it rather than reject their correction. However, I don't want to correct my online SA until I feel more confident of the correct answer.

sheramber

If your state pension is due for c weeks and 6 days then you get  x weeks and 6 days. The 6 days will be 6/7 of a full week. 

You cannot ignore the 6 days. 

Jeremy535897

The estimate of my pension (started 10th April, so 51 complete weeks) in my code is £11,406.
The actual receipts will be £11,436.70 (12 at £931.00 plus the first payment of £264.70).
Using the formula of complete weeks provided by David Heaton would give 51 weeks at £232.75 = £11,870.25.
Using LITRG would give £11,436.70 plus the 2 weeks that would be paid on 26 March and 2 April if I was paid weekly, giving £11,902.20. The difference appears to be that my first payment was actually £264.70 rather than £232.75, an extra £31.95. I thought that was for the 10th April (the first payment being for 8 days to 17th April), but a seventh of the weekly rate of £232.75 would be £33.25, not £31.95.
https://www.litrg.org.uk/pensions/state-pension/tax-state-pension
On balance, I think the LITRG figure is correct, because David's formula assumes I was paid for whole weeks throughout, but my first "week" included an extra day.
Quite how HMRC expects the average pensioner to navigate all this is beyond me.
The last two digits of your national insurance number determine the day of the week you are paid:
https://www.gov.uk/state-pension/when-youre-paid
10th April is not my birthday, by the way. I deferred my pension into the tax year following my 66th birthday.

molerat

The first (part) week would likely have been at previous year rate so £31.95 looks about right for 1/7th of that.

polar_pig

Jeremy thank you for your reply and providing more data to allow me to try to reverse engineer DWP calculations. Do you know how much DWP/HMRC believe your entitled pension should be? 

I agree David Heaton's method would give you 51 weeks at £232.75=£11870.25. 

When you say "using LITRG" do you mean the example of Christine in your link below...

https://www.litrg.org.uk/pensions/state-pension/tax-state-pension

or the example of Wes in the link... 

https://www.litrg.org.uk/pensions/state-pension/tax-state-pension/how-tax-collected-state-pension 

I get the same result using DH's method or either of the LITRG examples. 

I note your TCN states £11406 and that is within the £1 rounding error for exactly 49 weeks pension. I don't know why your TCN is 49 weeks whilst there are clearly 51 complete weeks of entitlement. 

Regarding the first payment, I believe you were entitled to 8 days (10th to 17th April inclusive) at £33.25/day that would be £266.00. Your actual payment of £264.70 is a little low but maybe due to some weird rounding or as molerat suggests, due to some hang over at the previous lower rate at the start of April.

So, CAN one ignore the fractional week (6 days in my case)? I'm not sure till a calculation is determined. However in my case HMRC are rounding it to 7 days and that seems to include one days entitlement into the next tax year.

Dazed_and_C0nfused

polar_pig said:

Jeremy thank you for your reply and providing more data to allow me to try to reverse engineer DWP calculations. Do you know how much DWP/HMRC believe your entitled pension should be? 

I agree David Heaton's method would give you 51 weeks at £232.75=£11870.25. 

When you say "using LITRG" do you mean the example of Christine in your link below...

https://www.litrg.org.uk/pensions/state-pension/tax-state-pension

or the example of Wes in the link... 

https://www.litrg.org.uk/pensions/state-pension/tax-state-pension/how-tax-collected-state-pension 

I get the same result using DH's method or either of the LITRG examples. 

I note your TCN states £11406 and that is within the £1 rounding error for exactly 49 weeks pension. I don't know why your TCN is 49 weeks whilst there are clearly 51 complete weeks of entitlement. 

Regarding the first payment, I believe you were entitled to 8 days (10th to 17th April inclusive) at £33.25/day that would be £266.00. Your actual payment of £264.70 is a little low but maybe due to some weird rounding or as molerat suggests, due to some hang over at the previous lower rate at the start of April.

So, CAN one ignore the fractional week (6 days in my case)? I'm not sure till a calculation is determined. However in my case HMRC are rounding it to 7 days and that seems to include one days entitlement into the next tax year.

For PAYE purposes HMRC seem content with complete weeks.

https://www.gov.uk/hmrc-internal-manuals/paye-manual/paye76086

If you wish to challenge the "correction" HMRC have made to your tax return it is up to you to provide the figuresl you believe to be correct.

You may also find it useful to read the notes relating to completion of this element of your tax return, which you don't appear to have done so far.

polar_pig

Thank you. Both the references you cite should be authoritative as they are from HMRC. One would also hope they would provide clarity.

PAYE76086 is about tax code calculation resulting from the SP...

Where the actual amount of state pension / benefits are included in the CY tax code, the benefit will be calculated automatically as follows

·                       Calculating the number of complete weeks from the start of the benefit to the end of the tax year (for example, number of days divided by 7, rounded down)

·                       Multiplying the weekly amount of state pension by the number of complete weeks

This is pretty clear and produces a result that matches the TCN I received from HMRC. All good.

Regarding the SA notes (TRG6/7) ...

If your State Pension changed during the year or you only received it for part of the year, multiply each amount by the number of weeks that you were entitled to receive it. Add up your amounts carefully.

This is less clear in my opinion, as it doesn't specifically state how the number of weeks is calculated, it doesn't say "completed weeks" for instance, but I would have accepted that it *could* result in the same figure as the TCN depending upon the interpretation. Indeed, I did use this figure in my SA!

However, my conclusion when filling in my SA is now put in doubt due to the HMRC correction to my SA by adding an extra week of entitlement that seems to extend into the following tax year. I can only provide the correct figures on my SA if the required calculation is made crystal clear. Otherwise, like countless others, I have to guess and surmise.

This might seem rather pedantic, but the resulting tax paid is not necessarily corrected in the following tax year either.

BTW I had previously read both references.

sheramber

Jeremy535897 said:

The estimate of my pension (started 10th April, so 51 complete weeks) in my code is £11,406.
The actual receipts will be £11,436.70 (12 at £931.00 plus the first payment of £264.70).
Using the formula of complete weeks provided by David Heaton would give 51 weeks at £232.75 = £11,870.25.
Using LITRG would give £11,436.70 plus the 2 weeks that would be paid on 26 March and 2 April if I was paid weekly, giving £11,902.20. The difference appears to be that my first payment was actually £264.70 rather than £232.75, an extra £31.95. I thought that was for the 10th April (the first payment being for 8 days to 17th April), but a seventh of the weekly rate of £232.75 would be £33.25, not £31.95.
https://www.litrg.org.uk/pensions/state-pension/tax-state-pension
On balance, I think the LITRG figure is correct, because David's formula assumes I was paid for whole weeks throughout, but my first "week" included an extra day.
Quite how HMRC expects the average pensioner to navigate all this is beyond me.
The last two digits of your national insurance number determine the day of the week you are paid:
https://www.gov.uk/state-pension/when-youre-paid
10th April is not my birthday, by the way. I deferred my pension into the tax year following my 66th birthday.

HMRC don't work out your pension.

DWP  advise HMRC on the amount paiyable/paid.

pinnks

My understanding is that you take the first part-week's amount, that gets you both onto your fixed payment day and your 4-weekly rhythm, and then count the number of full weeks between that and 5 April as your entitlement arises at the end of a payment week.  For me that is easier than counting days and dividing by whatever, and ensures you are viewing the issue by reference to your entitlement day of the week.

For both of our pensions the pre-populated SA return ignored the first part week and when I challenged HMRC on it the SA team appeared totally clueless and basically said, "do what you like".  We put in the correct figures as above and it was not challenged for changed...