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Tax liability for back-dated pension

Practical Issues
Amaryllis
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Tax liability for back-dated pension

#252380

Postby Amaryllis » September 17th, 2019, 10:13 am

I am trying to help my husband sort out his tax liability for his index-linked final salary pension (from a job he left nearly 20 years ago).

He is still working, but became eligible to draw this pension in 2014. Thinking that he would not be able to get it until he turned 65, he did nothing. Having finally woken up to the fact that he could have drawn his pension since turning 60, he got his pension backdated to 2014 and received all the payments that he should have received over the years in one lump sum.

However, his pension provider deducted tax for the full amount (70k), rather than applying the basic tax rate on a year-by-year basis - which pushed him into a higher tax bracket. So he ended up paying much more tax than he would have done if he had been receiving the pension payments each year after he became eligible.

He has to file his tax return for 2018/19 and doesn't know how to account for this pension payment, which he received in June of this year. Can anyone help please?

ursaminortaur
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Re: Tax liability for back-dated pension

#252388

Postby ursaminortaur » September 17th, 2019, 10:39 am

Amaryllis wrote:I am trying to help my husband sort out his tax liability for his index-linked final salary pension (from a job he left nearly 20 years ago).

He is still working, but became eligible to draw this pension in 2014. Thinking that he would not be able to get it until he turned 65, he did nothing. Having finally woken up to the fact that he could have drawn his pension since turning 60, he got his pension backdated to 2014 and received all the payments that he should have received over the years in one lump sum.

However, his pension provider deducted tax for the full amount (70k), rather than applying the basic tax rate on a year-by-year basis - which pushed him into a higher tax bracket. So he ended up paying much more tax than he would have done if he had been receiving the pension payments each year after he became eligible.

He has to file his tax return for 2018/19 and doesn't know how to account for this pension payment, which he received in June of this year. Can anyone help please?


I'm not a tax expert by any means but I don't see that this is any different than if he had had a SIPP that he could have accessed in 2014 but didn't and this year has taken out £70k - the money was taken this year and thus is fully taxed as taken this year rather than treated as if it had been taken over multiple years. Hence I'd think that the pension provider has acted correctly in deducting that tax.

pochisoldi
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Re: Tax liability for back-dated pension

#252398

Postby pochisoldi » September 17th, 2019, 11:48 am

Do any of the following help at all?
https://www.accountingweb.co.uk/any-ans ... -a-lumpsum

https://forums.moneysavingexpert.com/sh ... ?t=4724903

Both of these refer to https://www.gov.uk/hmrc-internal-manual ... l/eim74103

I'm not a tax expert by any means but I don't see that this is any different than if he had had a SIPP that he could have accessed in 2014 but didn't and this year has taken out £70k - the money was taken this year and thus is fully taxed as taken this year rather than treated as if it had been taken over multiple years. Hence I'd think that the pension provider has acted correctly in deducting that tax
.

I'll split this in half.

1) The pensioner did not actively defer their pension, so the comparison with deferring a SIPP is not valid...

https://www.gov.uk/hmrc-internal-manual ... l/eim74101 clearly states:
"In many cases, the taxable pension income for a tax year is the amount accruing in that year irrespective of when any amount is actually paid. Where accruals basis applies, the pension, etc. should be assessed on the amounts that the pensioner is entitled to in the tax year"

The usual way this happens is where the timing of pension payments results in (say) 53 fortnightly payments in one tax year, and 51 in the next.
It is equally valid where there are (say) no payments for 4 tax years, and 60 in the fifth.

2) "I'd think that the pension provider has acted correctly in deducting that tax."
I agree with this - They have applied the rules to the income that they pay.
Other than noting any PAYE tax code, they can't take into account the specific circumstances of the recipient.
It is for the recipient to ensure that they have paid the correct amount of tax, and to take whatever action is required to pay any additional tax due, or get any overpaid tax refunded.

PochiSoldi

Amaryllis
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Re: Tax liability for back-dated pension

#252403

Postby Amaryllis » September 17th, 2019, 12:51 pm

Thank you for these replies.

I understand that the pension provider "applied the rules to the income that they pay", and that they "can't take into account the specific circumstances of the recipient".

What I am trying to ascertain is how my husband should deal with this with HMRC, i.e. what does he need to do to get the overpaid tax refunded.

I'm sorry if this question seems terrible simplistic, but neither of us has had to deal with pension income before. Does he need to file amended tax returns for these past tax years (back to 2014), or write to them with documentation and an explanation of what has occurred?

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Re: Tax liability for back-dated pension

#252409

Postby vrdiver » September 17th, 2019, 1:44 pm

Amaryllis wrote:What I am trying to ascertain is how my husband should deal with this with HMRC, i.e. what does he need to do to get the overpaid tax refunded.

From the hmrc link that pochisoldi gave:
Arrears of pension
If a pension provider discovers a long-standing underpayment of pension, the underpayment is calculated and paid in a single sum. The provider is required to operate PAYE on the lump sum, which may give rise to higher rate liability for a pensioner who is usually a basic rate taxpayer. The pensioner should contact the tax office and supply a schedule showing the years to which underpayments are attributable. HMRC will spread the payments back over the relevant years and recalculate liability. Underpayments in the earlier years may be set-off against the resulting over-payment in the year of the lump-sum

So basically you need to work out how much of the lump sum should have been paid as pension in each tax year and then contact the tax office to ask them to recalculate your tax liability.

(Your pension provider may be able to help with that calculation - after all, they must have done it themselves!)

it's a pain, but I don't think there's any other way to recover the overpaid tax.

VRD

Edited to add suggestion re pension provider helping with calc.

Amaryllis
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Re: Tax liability for back-dated pension

#252411

Postby Amaryllis » September 17th, 2019, 1:48 pm

Many thanks - I'll get him to write to HMRC.
Really appreciate everyone's help and patience!

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Re: Tax liability for back-dated pension

#252412

Postby scrumpyjack » September 17th, 2019, 1:50 pm

The Revenue recognise that this situation arises

https://www.gov.uk/hmrc-internal-manual ... /sam121160

"Payments of pension arrears covering a number of tax years are becoming increasingly common. For example, some former part-time employees are being given rights to retrospective membership of occupational pension schemes. As a result, those former part-time employees who have since retired may become entitled to a pension or an increased pension. Many will be entitled to arrears of pension for the period from their retirement date.

Taxable pension is the amount to which the pensioner is entitled in the tax year. A payment of arrears of pension may be a substantial sum covering a number of tax years and the statutory (accruals) basis should thus be applied on request where it is to a taxpayer’s advantage."

You should contact the Revenue quoting their own manual to them and ask for the tax position to be corrected.

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Re: Tax liability for back-dated pension

#252413

Postby vrdiver » September 17th, 2019, 1:56 pm

scrumpyjack wrote:Taxable pension is the amount to which the pensioner is entitled in the tax year. A payment of arrears of pension may be a substantial sum covering a number of tax years and the statutory (accruals) basis should thus be applied on request where it is to a taxpayer’s advantage."

You should contact the Revenue quoting their own manual to them and ask for the tax position to be corrected.

Which is what the advice above suggests, but to do that, HMRC needs the details of how much (gross) pension was supposed to have been paid in each tax year, which only the OP or their pension company can provide.

When dealing with the tax office, I've rarely found it useful to start off by picking a fight - much more effective to be polite and ask for help, even when convinced it was their mistake, which in this case it isn't.

VRD

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Re: Tax liability for back-dated pension

#252417

Postby scrumpyjack » September 17th, 2019, 2:06 pm

Quite right VRD, I certainly wasn't suggesting picking a fight but one can very politely point out that one's request is based on HMRC's helpful guidance on the matter. It can avoid being fobbed off incorrectly. I have had to do this in the past, for example when HMRC's own system calculated my tax incorrectly because of an admitted fault in their system.


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