State Pension .... when taxed?

Mikeyorks

Often posted on this forum that tax on earnings, under PAYE is due at the point payment is made ..... not when they accrue. There are exceptions - but they are relatively rare (Equal Pay / Minimum Wage arrears .. for example).

But I've just bumped into the fact that pensions in general - and the State Pension specifically created the problem - is the opposite. The taxable income is derived from when the pension accrues .... not when it is paid.

http://www.hmrc.gov.uk/manuals/eimanual/EIM74101.htm

For most people the differences will be slender. But if, for example, you are due £100 pw State Pension from mid-Jan 08 (07-08) ... and choose to be paid (it's in arrears) every 13 weeks? Then the first payment will be made early April (but after the 6th - therefore in 08-09) ..... but you will likely finish with an underpayment of £1200 (£1200 @ 20% = £240 tax underpaid) coded out in 08-09 .... as well as a full £5200 coded out in respect of the accruing pension. (the underpayment obviously relating to 07-08). (Precisely the example that drew it to attention)

I've found this a bit of a surprise. Always knew about some of the odd exceptions to the general rule of 'tax due when paid' .... but never realised the State Pension was an exception (along with occupational pensions ... but they tend to seam straight on, under PAYE, from salary) in total.

Except ..... if you defer the State Pension for over a year ..... and then opt for a lump sum. The lump sum is taxed at your marginal rate (without accumulation or adverse effect on age related allowances) .... and then goes on to ignore the previous rule and is taxed when paid!


Am I alone in being ignorant of this (generally) PAYE oddity? Or are most people oblivious of it. I've turned up copies of P161s etc etc ..... and it doesn't appear to rate a mention nor has it been easy to pin it down on the HMRC site.

whatatwit

But, HMRC try to code out the State Pension in the year it is first received (or due to be received) to try and avoid any underpayments......or that's what used to happen.....Full amount coded out and put on a week/month 1 basis for the remainder of the year.
So in an ideal world, the extra tax would be collected :rotfl:

Mikeyorks

The problem is that HMRC is in arrears to a degree not seen for several years. They do attempt to issue the P161 (Pension Enquiry) several weeks before the pension is payable .... and then the amended Code. But they're beginning to fail - hence my example.

But even when they do it timeously. Virtually everyone who has a birthday within 4 weeks of the 6th April is going to bump into what I've described. And I'm sure most are going to be surprised they have an underpayment ... for money not yet paid!

jimmo

If we ignore the problem of post arrears at HMRC and go back to the original question in principle I think the answer will be “tough!”
If you choose to receive your State Pension 1/4ly in arrears, that’s your choice. If you choose to delay receiving money you are entitled to until later you are not going to delay the tax liability.
In my “good old days” company directors were assessed on the “earnings basis” rather than “receipts basis” and I suppose they might now call the method of assessing pensions as the “entitlement basis”.

jem16

Probably best to have it paid weekly in advance as opposed to every 13 weeks in arrears.

whatatwit

Mikeyorks wrote: »

The problem is that HMRC is in arrears to a degree not seen for several years. They do attempt to issue the P161 (Pension Enquiry) several weeks before the pension is payable .... and then the amended Code. But they're beginning to fail - hence my example.

But even when they do it timeously. Virtually everyone who has a birthday within 4 weeks of the 6th April is going to bump into what I've described. And I'm sure most are going to be surprised they have an underpayment ... for money not yet paid!

Hi Mike....I hadn't realised that HMRC was once again working weeks behind.....whatever happened to all the wonderous systems we used to have....colour coded post files. Oh the memories come flooding back.

Not only will people be surprised that they have an underpayment, a lot are stunned that the State Pension is taxable at all, and whilst there is Age Allowance for the 65+, if they have worked up to being 65, then a lot will be over the upper limit for that also.

Mikeyorks

Perhaps worth recording (I'd forgotten this thread ) - that HMRC happily (?) backed down on an underpayment in this case once this aspect (link as post #1) was pointed out to them :

Pensioners are often content to pay income tax on the amount received in a year, as, in most years the amounts accruing and received are similar. However, it is possible in certain circumstances for the amounts to be different. If a taxpayer requests the statutory basis this should be accepted.

...... it's a 'one off' for most people but visibly impacts those taking a State Pension where they opt for '4 weekly' and their birthday is within the month prior 5th April.

jimmo

Sorry, I don’t follow.
I’m only talking from memory here but feel pretty confident that EIM 74101 reads exactly the same as it did in May. Checking the recent changes section it has not been altered this year.
Has there been a recent change that I have missed?