Taxation on state pension

brewerdave · 16 July 2018 at 12:32PM

About to start taking my deferred SP. Have this morning received a new tax code from HMRC which includes a full year's worth of my SP as would have been WITHOUT deferral.

However, in the notes it says that they know it shows the estimated SP for the full year but they know that I won't receive the full amount consequently have adjusted my tax free allowance so I only pay tax on the amount I receive. Except I can't see any adjustment!
My tax code ends with an X -is this an instruction to my pension provider to not back date tax due to the start of this tax year?
Further, at some stage I will get my Choices letter from DWP -I intend to take extra pension rather than lump sum -will they reissue tax code as now,or wait til next tax year to adjust ?? Fairly important to me as the SP replaces another source of income!!

xylophone · 16 July 2018 at 1:50PM

My tax code ends with an X

https://www.gov.uk/tax-codes/emergency-tax-codes

brewerdave · 16 July 2018 at 4:01PM

Thanks Xylophone.So I will pay tax for the rest of the tax year on a non cumulative basis.
It would help if the Notice of Coding explained better . For "X" it just says " we will review the tax you have paid after 5 April" - could mean anything.

Also the statement about adjusting my tax free allowance is bunkum - the value of my SP is shown as 52 weeks worth ,even tho' I will only receive 37 weeks!! So no adjustment.
Also its not clear what will happen if/when they start to pay the higher deferred rate. Makes it difficult to budget for the rest of the year.

[Deleted User] · 16 July 2018 at 4:43PM

brewerdave wrote: »

Also the statement about adjusting my tax free allowance is bunkum -.

Nope!

Your new code will apply for the remainder of the year to take into account your state pension. There are eight months left in the tax year and you will pay tax, therefore, on 8/12 of your annual pension as that is what you will receive between now and the end of the tax year.

sheramber · 16 July 2018 at 6:21PM

Once HMRC are notified of the increased amount of pension they will amend your code number.

Tax will be deducted at your payable rate.

If you are already paying tax then the extra will be taxed at basic rate or higher rate depending on your income.

Spidernick · 16 July 2018 at 11:48PM

The way PAYE works your tax code has to show the annual amount when the code changes partway through the year, otherwise you would underpay tax.

To give a simple example: if the annual amount was £12K and you started receiving this after three months of the tax year, you would receive only £9K, but if that was reflected in your tax code then it would only tax 1/12th of £9K each month, rather than 1/12th of £12K, the latter, of course being correct.

If you start receiving extra in 18/19 then the same principle should apply at that time and again the annual amount should be included.

It is a little difficult to explain, but hopefully this helps in some way. The first year of starting to receive the SP does throw up anomalies like this, but once you get into a full year of receiving this, things should start to be on an even keel.

brewerdave · 17 July 2018 at 9:01AM

Thanks to all who have replied. I think I'm with it now!!

Basically the Notice of Coding needs a bit more detail:)

Newly_retired · 25 July 2018 at 8:56PM

I lost count how many different notices of coding I received during my first year of retirement, as first SRP, then an annuity, then additional I.e. deferred SP kicked in. It all worked out in the end.

Taxation on state pension

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