Tax bill for pensioners

I read somewhere, not so long ago, that private pensions and other income, will not be taxed at source. I remember talking to my friend about it. She receives a couple of pensions. It doesn’t affect me because my main income is maintenance (alimony), on which my Ex pays Tax

Basically, individuals are now responsible for their own income tax. I foresee a lot of tax evasion going on ……

I received a letter saying the IR had miscalculated and I owed them about £120 and they were going to deduct around £12 a month from my pension.

Perhaps your mother should go down the "poor" route and pay a sum monthly.

Please check the letter is genuine.

Savings are not taxed at source, they are paid with gross interest. If your mother has earned interest in non ISA accounts in excess of £1000 then she may be liable to tax on them. Any tax liability for pension income, that is the aggregate of private and state pension, will be deducted from the private pension as the state pension is always paid gross.

Thanks, crazyH

I would like to be able to reassure my mum, but I just don't know what is going on. My pension is taxed at source, as is my husband's. Our occupational pensions are taxed because of the uplift the state pension gives to them (regardless of the fact that we paid into both).

My mum didn't work other than for a few years after my younger sibling left school. She did pay into the earnings-related SERPS and she inherited my father's pension when he died. I think she got both his state and civil service benefits. I know she gets a lot more than I do, despite the fact that I worked from 16 to 58 and paid higher rate tax for much of that time, but I don't know why she suddenly owes what seems like a lot of tax on savings this year when last year she didn't.

Sorry - I have had a few phone calls since posting originally. I am not ignoring posts, but will reply tomorrow if I know now more than I do now.

Thanks to those who have replied

Recent increases mean that more people will receive a tax demand because their pension(s) now exceed the Personal Allowance, which has been frozen for some time.

The State Pension is paid without tax being taken off, so the tax code will be changed to take tax from an occupational pension. If someone has no occupational pension, they may receive a tax demand, if their state pension is over the Personal Allowance.
Sometimes there is tax owing, so it has to be paid separately, eg when income from savings interest exceeds the allowance, which for most people is £1000.

I can think of two reasons and suspect it's a combination of the two.

Assuming she is a basic rate taxpayer, that £800 would equate to £4,000 of income that hasn’t been taxed.

One

Taxable savings accounts are not taxed at source. They haven’t been since 6th April 2016.

Following 14 years of negligible interest for savers from 2008 to 2022, rates increased substantially in the autumn of 2022 as a result of the cost of living crisis.

It’s possible she has money in accounts that have given her a far better return since then, perhaps some of the interest paid in 2022/23 and some in 2023/24.

If she hasn’t submitted a tax return or returns, the demand could be based on estimates.

The best thing to do is to get her to check her bank records for certificates of interest for those two years. These should be available online if she is registered for online banking.

Don’t forget there is a Personal Savings Allowance of £1,000 a year for basic rate taxpayers so the first £1,000 of interest is tax free.

Two

You say she pays tax on her SP through PAYE but don’t mention another pension. There is no monthly mechanism to tax SP through PAYE unless there is an occupational pension to operate a tax code against.

It sounds like she might have a good inherited SP from your father. It’s possible to have a SP of up £387 pw where someone wasn’t contracted out of SERPS. It’s very common for elderly widows to have SPs well in excess of £300 a week because their late spouse was never in a works pension scheme.

If there is another source of income to operate a tax code against, even if the SP exceeds the personal allowance of £12,570, it’s possible to have a negative tax code - which has a K suffix - to collect the extra tax but the other source has to be large enough to bear the extra monthly deduction.

An SP of £320 a week on its own would give rise to an underpayment of around £800.

My reply above was based on the info in the openng post before seeing what you wrote at 21:34 about the inherited CSP. So there is scope to have a tax code but negative K codes are often inaccurate and/or can't make sufficient adjustment to collect the correct amount of tax where the SP is substantial.

Your mother should have a tax code sent to her each year and a letter explaining how her tax is calculated.

Years ago, but after he had retired, DH had a demand from the HMRC saying he owed £5,000. This was very worrying as his pension income was all PAYE.

When we phoned, the person at HMRC could not tell us how this had been worked out or accumulated and said that his income from separate works pensions and a state pension was dealt with at different tax offices. She said that meant that one tax office might not know what another tax office was doing (or words to that effect!).
She said it was up to him to prove he didn't owe this. He had to ask an accountant to investigate, luckily he had paperwork going back for years.
It turned out he didn't owe this money at all, it was a mistake but it cost him £500 to prove it.

If it does turn out that your mother does owe this money, she can offer to pay it back in gradual instalments, eg £5 per month.

That was years ago. It doesn’t work like that now. Tax codes are not automatically sent out. Much is paperless via Gateway. Where paperless, changes in tax code are notified by email.

It is highly unlikely that HMRC would allow arrears of £800 to be paid off at £5 per month. The normal length of a payment plan is twelve months or possibly 2 to 3 years. £5 pm wouldn’t even come close.

If the arrears cannot be collected through an adjustment to the tax code which, if the State Pension is already in excess of £12,570, would require an even bigger negative K code, HMRC will demand a direct payment.

If time to pay is requested:

HMRC will ask for

• Monthly income from all sources.
• Assets including savings accounts and physical assets that could be sold to raise money to pay the outstanding tax.
• Monthly regular outgoings on living expenses.

HMRC will expect someone to use funds from savings or investments to reduce the tax that is owed.

Any payment plan will also include interest that accrues on late payment.

From 6 April 2025, late payment interest is set at base rate (which is currently 4.5%) plus 4% so that will be 8.5%. It is currently base rate plus plus 2.5% so 7%. Those rates are set high to encourage people to pay promptly.

The o/p refers to a letter from HMRC. This isn’t helpful.
It’s far more likely that what is received is a Notice. The Notice type could help us to provide a more accurate explanation.
Could the o/p state:
1. The Notice type/ number.
2. The tax year that the notice refers to.

Go to Citizens Advice or Age UK and ask for advice on this. Thye are far more likely to be able to explain things than we can.

I can explain things. Fifty years senior experience in the business on either side of the fence. Without details it’s guess work but with uncomplicated finances, this can only relate to pensions and savings.

To expand on what VANECAM wrote. A P800 assement is where any underpayment can usually be collected through a PAYE tax code adjustment. A Simple Assessment PA302 is where someone has tax to pay that cannot be collected via a PAYE tax code, and there may be no criteria for completing a self assessment return.

As DD’s mother’s friends are receiving similar notices, this is almost certainly to be for 2023/24 but could be an accumulation of one or more years. That HMRC are sending these notices now is so that a coding adjustment can be made for 2025/26 where that’s possible.

A K code can attempt to collect the tax due on all pensions plus arrears from previous years but no tax code can take tax of more than half of each period’s pay or pension. If HMRC calculate that a K code can’t collect all the tax due it will ask for it to be paid directly.

This from the PAYE manual.

www.gov.uk/hmrc-internal-manuals/paye-manual/paye11095

For example, say the SP is 3000 a year more than the personal allowance and arrears are 800. That means there’s 1400 to collect (3000 x 20% + 800) as well as 20% tax on the pension against which the K code is set. (The rest of the SP is using up all the personal allowance). Say the occupational pension is 4000. Tax on that alone would be 800 plus the 1400 totals 2200 so more than 50% of the pension. A K code wouldn’t be appropriate to collect the arrears. If the occupation pension is 5000 it would be.

It also occurs to me that your mother may have received a back payment under the LEAP exercise to identify the many women who have been underpaid state pension.

This is from the latest National Insurance Fund Annual Report & Accounts (AR&A)

2023/24

Underpayment of State Pension – Legal Entitlements and Administrative Practice (LEAP) Exercise

In early 2020, several cases came to light of DWP underpaying State Pension, which led to them undertaking detailed analysis to determine the scale of the problem. DWP formally commenced a LEAP exercise in January 2021 to identify affected cases and rectify them. Payments of arrears are to be funded and accounted for by the NIF in the period in which DWP makes the payment. Between January 2021 and the end of March 2024 the LEAP exercise has identified 99,558 underpayments affecting certain categories of recipients, notably married women, widows, and people aged 80 years and over. Up to 31 March 2024, DWP has paid arrears of £594 million and recognised a revised provision of £369 million in their 2023 to 2024 AR&A based on current estimation. DWP expects to complete this exercise by the end of 2024 to 2025.

More info on LEAP up to 30 September 2024. As you can see, there are some substantial payments being made.

www.gov.uk/government/publications/state-pension-underpayments-progress-on-cases-reviewed-to-30-september-2024/state-pension-underpayments-progress-on-cases-reviewed-to-30-september-2024

I've had a demand for £90 saying it will be deducted. It puzzles me because I've never underpaid in almost 60 years of working.

I have wondered whether it's worth paying someone to check it for me. Probably cheaper to just pay it.

It just makes me cross to think of the companies - and others- not paying tax in this country. I had no idea I wasn't paying enough I always just pay/paid what was required of me.

Thanks everyone. I have suggested that my mother rings them to ask for clarification.

I suspect they have calculated tax on interest on savings above the £1,000 granted by the government. Before this interest was taxed at source. For years the interest rate has been so low that it was unlikely that most people would exceed that limit. However,interest rates rose again a couple of years ago and HMRC are gathering what they can. The letter usually refers to the amount owing as based on a simple tax estimate and figures are given. My dh had to pay around the same amount as your mother. We paid this although savings are in joint accounts. I thought that was it until letters to both of us was claiming over £600 from each of us for 24/25 and this was being coded out until the 1st of April this year. So that was over 3 months.Then they say the coding will change but take into consideration the interest in savings from this last year. As interest rates are going down I hope this will be reflected in the codings of 2026/27. Your mother should have received a simple estimate statement to explain the amount owing.

M0nica

Go to Citizens Advice or Age UK and ask for advice on this. Thye are far more likely to be able to explain things than we can.

They would just tell you to ring the tax office. There will be a number on the statement.

That's just my experience with AgeUK- my experience with CA is you wait weeks to speak to someone on the phone...

Lovetopaint. Yes, I remember we discussed that at the time.

Sallyforth. Just add up your income, deduct the tax personal allowance of £12,570 and multiple the net amount by 20%. Check your P60, if you have one, to see what tax you paid and the difference is the underpayment.

£90 underpaid is equal to £450 of income that has gone untaxed in the year. Someone with a SP of £250 a week and no other income would end up £90 underpaid.

This is a result of fiscal drag. The tax allowance used to be linked to CPI inflation but Sunak froze the allowance and subsequent chancellors have continued with the freeze. This freeze coupled with the big 10.1% triple lock increase in April 2023 has pulled a lot of pensioners into the tax net.

Many pensioners, especially older women who have inherited SP, or were not contracted out of SERPS, now have a SP in excess of the tax personal allowance. A pension of over £240 a week will put someone over the £12,570 meaning they need a K code as explained above in order to pay the correct amount of tax through PAYE on pay or other pension(s).

There was an article in The Mail on Sunday saying these bills areappearing because for about the last 10 years the HMRC hve been lackadasiical about checking interest on some investents people have. They know you have the investment but haven't chased up getting the annual returns these companies are meant to submit. They have now done this and you are being charged for interest on investments, you had previsously been receiving interest without tax deduction.

silverbrooks Many thanks for taking the time to explain so clearly how I can a) begin to understand how the shortfall will have been calculated and b) why the shortfall may have occurred. I'll have to read it several times!

I'm thinking it is connected with some interest gained from a savings account. I always thought tax was deducted at source by the bank.

Special thanks for taking the time to reply on this busy Mothering Sunday!

Sallyforth

You are welcome. It’s just a gardening day for me but I have come in for a break from the sun and some lunch.

Tax hasn’t been deducted at source since April 2016. Interest rates started going up again in September 2022 so it could be that.

M0nica

The Mail would make a story out of something like that but for the vast majority of people it wouldn't have made any difference to their tax.

Interest rates were next to nothing for fourteen years after the 2008 crash until the autumn of 2022.

By January 2009 the base rate had dropped to 1.50%. By March 2020 it was 0.10%. It didn’t start rise above 2% until September 2022.

The Personal Savings Allowance of £1,000 tax free per anum was introduced in 2016.

The base rate then was 0.25%. Few banks pay much above base rate. Someone would have had very substantial savings in a taxable account to have earned interest in excess of £1,000. £400,000 at a quarter percent would give you £1,000.

People with that level of taxable savings were almost certain to have already be to be making an annual tax return.

At 2% you’d need £50,000 in taxable cash savings to exceed the PSA. By autumn 2023/23 more people started to earn interest again which would exceed the PSA.

Bank of England base rate history:

www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp

We don’t have to declare interest and pay the tax on it until the deadline, which for 2023/23 was 31 January 2024. Similarly for 2023/24 until 31 January 2025.

For the vast majority of people, HMRC had little need to start looking at taxable bank and building society interest until 15 months ago.

Sallyforth.
By phone the likely explanation that HMRC will provide is that the tax underpayment arises from bank etc interest received gross.
They will explain that Banks etc provide HMRC with the information about gross interest receipt.
When asked, HMRC will provide/confirm by phone, details of the said bank etc accounts.
Once your mum has that information, she should then have the assurance that the tax calculations are, at least, based upon correctly reported information.