New state pensions missed off 2010/11 tax codes
Taxpayers who started receiving the state pension in 2010/11 have not had the new pension included in their PAYE codes.
This is the latest in a succession of problems with coding notices issued by HMRC’s National Insurance and PAYE Service (NPS) computer. State pensions are not paid with tax deducted, and if the taxpayer also has income which is taxed under PAYE, the tax on the state pension is usually collected by including it in the relevant PAYE code. The DWP tells HMRC when it starts to pay a state pension, so that HMRC can put it in the pensioner’s tax code.
However, where this has not been done properly for 2010/11, the state pension will not have been taxed and those affected will have underpaid tax. These will be shown on the tax calculations forms P800 for 2010/11, which HMRC should send out some time in 2011/12. The P800s will be issued after HMRC has received information from employers and pension providers, and the NPS has carried out the reconciliation exercise for 2010/11.
The Tax Faculty has recommended to HMRC that those affected need to be made aware on the P800 that there is an underpayment arising because the state pension has not been included in their code number, and what their options are.
HMRC said it cannot write off these underpayments under the law, and that Extra-statutory Concession A19 (ESC A19) is not applicable because the underpayments are for current tax. Under ESC A19, HMRC will write off tax where it took more than 12 months after the end of the tax year to tell someone about an underpayment and the person could reasonably have believed their tax was correct.
Where underpayments are less than £2,000, they will be coded out in future years’ PAYE codes. Where the underpayments are £2,000 or more, HMRC will contact the taxpayers. HMRC has said it is prepared to allow taxpayers to pay over three years via coding out, commencing from 2012/13, and taxpayers who want this treatment should ask HMRC using the helpline 0845 300 0627. Agents calling on behalf of clients can call the agent dedicated line on 0845 366 7855.
The usual rule is that HMRC will not code out an underpayment greater than £2,000 or where the underpayment would more than double the liability on the income to which the code applies. We have asked HMRC to allow taxpayers affected by this problem to ask for these rules to be over-ridden
We understand that these pensions first payable in 2010/11 will be correctly included in 2011/12 codings.
HMRC has made the same mistake in previous years as well. See our January news item PAYE coding notices and reconciliations – latest information. However, for 2009/10 and earlier years HMRC has decided to write off all tax underpayments caused by omitting the state pension from PAYE codes.