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Where Taxpayers and Advisers Meet

Early year adjustment and covid

lancasd
Posts: 2
Joined: Tue Sep 15, 2020 1:12 pm

Early year adjustment and covid

Postby lancasd » Tue Sep 15, 2020 1:26 pm

I retired in July 2018 but deferred applying for my Teachers Pension until Jan 2020. While regular pension payments were rapidly set up, the arrears was not paid until tax year 20-21 which pushes me into a higher tax bracket. I have requested an early year adjustment on the basis that the arrears payments were supposed to have been paid in 18-19 and 19-20 but am being brushed off. Might I be better claiming that the delay in processing the arrears was due to the effect of covid on Teachers Pensions - as a payment in 19-20 would have avoided the higher tax?

Lambs
Posts: 1474
Joined: Wed Aug 06, 2008 3:15 pm

Re: Early year adjustment and covid

Postby Lambs » Tue Sep 15, 2020 8:56 pm

L,

If I have understood your post correctly, you are saying that you have had too much income assessed (and therefore taxed at an unnecessarily high rate) because there were delays in bringing your pension 'online' and it was physically paid to you (or started to be paid) some months after the commencement of your claim.

This is distinct from your decision to defer your pension: if the deferral resulted in higher annual pension income and more tax, that is an unavoidable consequence of your decision to defer.

It may be that things will work themselves out over the course of the tax year: monthly pension may have been taxed too highly on the initial "lump" but pension income is ultimately taxed by reference to cumulative income received over the tax year as a whole. This could result in your getting a tax refund automatically, but after the end of the tax year when "End of Year Reconciliations" are run.

But it could mean that your total income for the 2020/21 tax year overall takes you into a higher tax band and some of it will now be taxed at a higher rate, and some of the income that 'belongs' to 2019/20 would have been taxed at a lower rate (or not at all) if it had actually been paid to you through PAYE in that earlier year.

A registered pension scheme (most pension schemes are registered pension schemes) is taxable as it accrues, not as it is paid. This is in accordance with ITEPA 2003 s 571 and s 579B, et seq.

HMRC's manuals confirm this in the employment manual at EIM74101, and the Self Assessment Manual at SAM20030:

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim74101

"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

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." (Extract, see EIM74101 as per the above link for more - and check how your particular category of pension income is taxed on the table therein)

https://www.gov.uk/hmrc-internal-manuals/self-assessment-manual/sam20030

Also

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

I don't know whether you are in Self Assessment or not but the guidance on those pages explain the principles and the steps HMRC should take. You will end up with a liability in 2019/20, for pension income to which you were entitled but did not receive. If you have done your sums correctly, (and assuming I have understood your query correctly), then your 2020/21 tax overpayment should be larger than your 2019/20 underpayment, resulting in a net tax repayment.

I trust this is useful.

With regards,

Lambs

lancasd
Posts: 2
Joined: Tue Sep 15, 2020 1:12 pm

Re: Early year adjustment and covid

Postby lancasd » Wed Sep 16, 2020 8:34 pm

My original post was unduly short and not very clear but Lambs has understood what I
intended. The deferral had no effect on the amount of monthly pension, but
the issue was that the pensions arrears - the amount due for the period
between retirement in 2018 and making the claim in Jan 2020 - was not paid until
June 2020. If it had been paid in 2019/20 the total would have been below
the higher rate threshold, but in combination with the regular monthly
pension, it breaches this threshold in 2020/21.

There appear to be two approaches to contesting this. 1) to argue that the
arrears should be taxed in the year they "ought to have been paid"; 2) to claim
the the delay in paying the arrears was due to covid. I have been following
approach 1) but due to lack of progress I wondered if approach 2) might be more
successful. Lambs has illuminated the basis upon which the HMRC should proceed
and I am most grateful. I will persist!

bd6759
Posts: 3254
Joined: Sat Feb 01, 2014 3:26 pm

Re: Early year adjustment and covid

Postby bd6759 » Wed Sep 16, 2020 11:34 pm

The Tax Officers at HMRC do not get the training they used to. It’s all following step by step guidance which can’t cover all of the nuances.

If you are getting nowhere, I suggest you submit tax returns for the years in question. Self assess the correct liability. That puts the onus on them to challenge you.

Lambs
Posts: 1474
Joined: Wed Aug 06, 2008 3:15 pm

Re: Early year adjustment and covid

Postby Lambs » Sat Sep 19, 2020 2:59 pm

L,

I hope the foregoing will prove useful to you. I also hope you will get back to us in due course, to let us know if you received the repayment to which (it seems) you are entitled, or to let us know if HMRC is being "difficult". Ultimately this forum is about sharing knowledge.

I suspect that the HMRC operators with whom you have dealt thus far will be familiar with the mechanics of PAYE in a given year, and are assuming that any tax overpayment on commencement will "sort itself out" over / just after the end of the year, because your overall annual liability is reckoned by reference to the total income received in the tax year. This would indeed address most fluctuations in income but NOT if the total amount for the year contains a significant amount of income that actually belongs in a different year, in which you would be paying a different rate of tax.

I would concur with B's assessment of HMRC. It is increasingly peopled by processors, rather than practitioners.

With regards,

Lambs


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