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Where Taxpayers and Advisers Meet

Early year adjustment and covid

lancasd
Posts:5
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:1611
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:5
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:4262
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:1611
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

lancasd
Posts:5
Joined:Tue Sep 15, 2020 1:12 pm

Re: Early year adjustment and covid

Postby lancasd » Tue Nov 17, 2020 1:51 pm

An update on progress.

In September I sent a short letter requesting the statutory (accruals) basis,
and I was pleased in October to receive a P800 indicating that some of the arrears were being
regarded as being paid in 2019-20 - this of course came with a tax bill.

I was loath to pay this bill until the arrears for which I am am being taxed in 2020-21
were reduced - and this does not seem to be happening automatically. According
to the HMRC help line, adjustments in 2020-21 must be initiated by the Pension
provider as they are based on "real time information". I have been asked to
contact the Pension provider to request them to make this adjustment.

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: Early year adjustment and covid

Postby robbob » Tue Nov 17, 2020 2:31 pm

lancasd

You appear to be caught in some sort of groundhog day nightmare here - hmrc can do that to you unfurtunately.

I may be completely wrong here but it would seem competely illogical for hmrc to manually make the tranfer of earnings from 2020/21 to 2019/20 and not also manually do the matching transfer from 2019/20 to 2020/21 (ie reduction in this year)

I suspect the problem is you spoke to the genral helpline and they told you the wrong answer - if the pension provider has had no interaction with the tranfer one way factually speaking i would expect the provider to have no interation with the tranfer the other way. Note that might not be the case though as one year if closed year and the other is not!

I would simply be minded to write to the unit that wrote to you and ask them to confirm that the relevant manual adjustment will be made to your 2020/21 tax calculation by them (or via the pension provider if they are happy to action the relevant instructions direct with the pension provider that ytd totals should be changed) without you needing to take any action. She should also explicity ask that excess tax not be deducted in year so if there is a manual adjustment to your tax code needed if they can ensure your tax code is adjusted as approrpiate so that you are not paying higher rate tax when none is due - you may wish to confirm your expected year end pension (actual and wrong) and other income so hmrc have the correct relevant information to perform those calcs.

I have no idea being honest if the letter will work but i think a response from the correct team is much less liekly to end in you being fobbed off - you could ring the helpline again adn explicity state that they hmrc have confrimed the issue will be sorted and the lack of any code change or other adjustment therefore needs intervention by suitably trained individual or referral to ten relevant departement to action.

lancasd
Posts:5
Joined:Tue Sep 15, 2020 1:12 pm

Re: Early year adjustment and covid

Postby lancasd » Tue Nov 17, 2020 3:21 pm

Thanks robbob - depressing but helpful!

I was so relieved to see any movement at all that I optimistically assumed it was the end
of the process. The only evidence that HMRC have made an adjustment is the P800 and I
have not received any letter replying to my request. I will follow your advice and write to
them.

robbob
Posts:3228
Joined:Wed Aug 06, 2008 4:01 pm

Re: Early year adjustment and covid

Postby robbob » Tue Nov 17, 2020 5:07 pm

Can i just check that the 2019/20 p800 did specifically increase your taxable income for the purposes of the calculation for that year rather than simply move the tax from one year to the other.

Lambs
Posts:1611
Joined:Wed Aug 06, 2008 3:15 pm

Re: Early year adjustment and covid

Postby Lambs » Tue Nov 17, 2020 5:23 pm

L,

You have been advised incorrectly by HMRC. This is not the first time, if I remember aright.

There is NO adjustment to be made by the Pension Provider in relation to 2020/21. The Pension Provider seems highly likely to have taxed the amount as it has been paid, correctly, under PAYE/RTI - "Real Time Information".

The problem lies with HMRC's apparent inability to understand / follow even its own guidance, let alone actual legislation.

It is down to HMRC to move a corresponding proportion of the income 'earned' and assessable in 2019/20 from the amount reported by the Pension Provider in 2020/21, to that earlier year. HMRC's own guidance says to do this if it is to your benefit. That has nothing to do with the Pension Provider. You will end up with a liability in 2019/20 that should be more than covered by a PAYE over-deduction in 2020/21. CLEARLY, THIS SHOULD HAVE HAPPENED ALL AT ONCE.

Assuming that you concur with the recent 2019/20 P800 in terms of the adjustment made so far, I suggest that you write to HMRC to say that you are in receipt of a P800 for 2019/20 and are keen to establish the whereabouts of the corresponding calculation for 2020/21, which should show an even greater credit in your favour, and that you assume that they will take no further steps to collect the amount apparently owed for 2019/20 until the 2020/21 calculation is available.

We continually find ourselves having to apologise for, or commiserate with taxpayers regarding, HMRC's ineptitude.

Kind regards,

Lambs


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