HMRC Tax Refund/Demand

Civvy21

Good morning,

My wife and I are both retired. We both have work pensions but do not yet get the state pension. My wife retired just over 2 years ago and her pension is approx £11.k pa.

Last week my wife received a notification via the app from HMRC. It stated my wife was due a tax refund of approx £6k. Excellent news. We assumed it was due to over paying tax on her pension lump sum. We applied for the refund and the amount was duly paid into her account three days later.

About three days later my wife gets another notification stating that she has underpaid tax by approx £5.8k. They have given us a few months to pay it back.

At the same time my wife received a notification that her tax code has changed. She has started paying approx £50 tax on her pension.

It all seems very odd. Is it common for HMRC to issue a refund and then ask for almost the same amount back a few days later?

cheapskate2830

Yes, but mine was all sorts of problems due to becoming a widow. I still think my code is wrong but sick of it. It's a nightmare!

flaneurs_lobster

https://forums.moneysavingexpert.com/discussion/comment/82181254#Comment_82181254

Has this been posted to the wrong thread?

DRS1

We assumed it was due to over paying tax on her pension lump sum.

What sort of lump sum was that? Most lump sums from a pension are tax free and no tax would have been deducted from it when it was paid.

But maybe she drew an UFPLS payment initially?

Pensions and pension payments can take different forms so you may need to give a bit more detail.

You should also look at the tax years - maybe the repayment was for one tax year and the extra tax was for a different tax year. There should be some sort of calculation showing how they got to their totals.

sherlock228

sense check the info you have received…

what evidence is there she actually paid tax on the lump sum?
why would a lump sum have been taxed in the first place?

£50 tax on a code adjustment? Has she transferred allowance over to you and therefore her tax free pay is now below the threshold of her actual pension?

DRS1

A thought on the £50 - she should be able to see why her tax code was adjusted. It may be she has some untaxed taxable interest for example Logging into her personal tax account should show it (no idea what the app shows but maybe it is on there as well)

Civvy21

Thank you both for your help with this. Much appreciated.

I have had a look at the info in the HMRC app. The refund and subsequent demand both relate to the same tax year (25/26). That seems very odd to me. Why would they do that a couple of weeks apart? It doesn't make sense.

With regard to my wife's pension lump sum. When she retired she opted for a larger lump sum and smaller monthly payment. This was the opposite to what I had done as I went for the smaller lump sum and larger monthly payment. This meant that she did pay some tax on the lump sum. It may not have been the most tax efficient thing we to do but we had our reasons. Incidentally she had her lump sum paid in two installments over two tax years, which, we were advised, would the reduce the amount of tax paid. Overall we were very happy with the amount she received.

Like a lot of people I haven't a clue how the tax system works. I had been on PAYE all my working life and never had any dealings with HMRC. The same applies to my wife.

One minor correction. My wife's last monthly pension payment reduced by £30 not £50.

I will have another look at the data in the app to see what I can piece together. I must admit though I am finding it very confusing. I will also look again at the details of my wife's pension lump sum payments.

Grateful for any advice.

DRS1

I have had a look at the info in the HMRC app. The refund and subsequent demand both relate to the same tax year (25/26). That seems very odd to me. Why would they do that a couple of weeks apart? It doesn't make sense.

I can't explain it. It sounds like they made a mistake saying she could have a refund and are now clawing it back. She may need to call HMRC to know for sure. Calling early in the morning like 8 am is usually recommended so you aren't hanging on for a long time waiting for someone to answer.

With regard to my wife's pension lump sum. When she retired she opted for a larger lump sum and smaller monthly payment. This was the opposite to what I had done as I went for the smaller lump sum and larger monthly payment. This meant that she did pay some tax on the lump sum. It may not have been the most tax efficient thing we to do but we had our reasons. Incidentally she had her lump sum paid in two installments over two tax years, which, we were advised, would the reduce the amount of tax paid. Overall we were very happy with the amount she received.

I confess I don't understand this. The sort of pension where you can choose a higher or lower lump sum would be a defined benefit scheme. But such a scheme would not be paying her a taxable lump sum and would not be splitting the lump sum across tax years. You get one tax free lump sum when the pension starts. I suppose she may have paid some AVCs and then used the AVC fund to boost the tax free lump sum but then have had some AVC fund left over. But then the excess AVC fund would usually boost the pension or be available for a transfer out.

The times when you hear about people being taxed on their pension lump sums are when they have a defined contribution scheme and decide to take the whole pension pot in one lump. Then 25% is tax free and the other 75% is taxed. That can give you a very large tax deduction and mean you need to reclaim some of the tax deducted. But it doesn't sound like that happened here because she is receiving a pension.

I suppose she could have a defined contribution scheme and could have taken an UFPLS payment (taxed as 25% tax free and 75% taxable) in one tax year and then a FAD in the next year (where she gets a tax free lump sum upfront and then draws taxable pension maybe in monthly instalments later). That would get you two lump sums in two tax years with one of them subject to some tax and then have a monthly pension as well. But I am just guessing. Do you know what sort of pension she had - eg was she in something like the Local Government Pension Scheme?

LITRG

Hello Civvy 21. We know that understanding changes to the tax position can be difficult when starting to receive a pension. We have a number of guidance pages on our website which I believe are relevant to your wife's situation:

• Understanding the year-end 'P800' tax calculation: PAYE underpayments | Low Incomes Tax Reform Group
• Tax-free pension income: What pension income is tax-free? | Low Incomes Tax Reform Group
• What pension income is taxable and how it is taxed: Tax on pension income | Low Incomes Tax Reform Group
• Pension withdrawals: Pension withdrawals | Low Incomes Tax Reform Group

We hope this information is helpful.