Mrs P now aged 65, had started receiving a widow’s pension at the age of 58 following the death of her husband. When she reached age 60, she started to receive her state pension and the widow’s pension ceased. The state pension she received was more than the widow’s pension. At age 65, she became entitled to age-related personal allowances, but out of the blue she received a demand for back taxes of £3,500 and went to seek help from TaxHelp for Older People (TOP).
Mrs P was sent a pension enquiry form P161 following the death of her husband and she told HMRC she was receiving the state widow’s pension. This was taxed by reducing the personal allowance she was due and shown in her PAYE code for her occupational pension income from the local council.
On reaching age 60, Mrs P’s own state pension became payable, replacing her widow’s pension. Her state pension was paid at a higher rate than the widow’s pension. She received no forms from HMRC at the time. She assumed that they knew, as before, about her state pension income and as she did not understand how the PAYE code on her occupational pension collected tax on her state pension, she did nothing. Her PAYE codes continued to be based on the lower widow’s pension, increased only to take account of inflation each year.
Just before age 65, Mrs P received a Pension Enquiry form P161 from HMRC so that they could establish her entitlement to the age allowance (see our second article in this series).
Following completion, HMRC established that Mrs P had been receiving more state pension than she had been taxed on and advised her she owed nearly £3,500.
Why did this happen?
For women, the state pension age is currently 60. From 2010, this will gradually start to rise to age 65. By 2020, it will be 65 for all women. Increased personal ‘age’ allowances begin at 65.
Mrs P’s difficulties arose as she was widowed before the age of 60. Whilst HMRC did ask her what pension she was receiving following the death of her husband, a subsequent enquiry was not triggered at her normal retirement age of 60.
Only when she reached 65 and her entitlement to age allowances began did the problem come to light. HMRC should have asked Mrs P whether her pension position was going to change at 60. HMRC should have subsequently matched the data sent by the Pension Service against the amount that they were including in Mrs P’s coding, but they did not. HMRC argued that even if this were so, Mrs P should have realised that an increased pension at age 60 would have meant an increased liability to tax and she should have contacted them.
In Mrs P’s case TOP was able to show that HMRC had not followed their own procedures and eventually HMRC agreed to reduce considerably the amount of back tax demanded.
What should happen?
As we noted in our first case study there is hope in 2008 that this type of information will be automatically be brought together by new HMRC processes.
However we fear that HMRC may leave this matching of data until 2009 so that more cases like those for Mrs P will remain undetected until then.
Whether a pensioner should have to meet this unexpected liability in full when it comes to light will depend upon the facts of each individual case; but is unrealistic of HMRC to expect people unused to the workings of the tax system to spot that HMRC have made a mistake, especially since over the years HMRC has progressively reduced the helpful information given to people under the PAYE system..
If you do not get a coding notice from HMRC, ask for one to be sent to you. You should always check that it includes the correct amount of state pension by adding up the amount you should receive in a year (an easy way is to multiply the weekly amount by 52). Be particularly alert if, as in Mrs P’s case, your pension changes. But make sure you do not include any tax-free welfare benefits in your calculations.
Contact HMRC if you think that they are taxing the wrong amount of state pension or if you do not understand your coding notice.
TOP is a charity providing free advice on tax to older people on low incomes who could not otherwise afford any professional help. If you think the above situation also applies to you or you need help with other tax problems please have a look at the TOP website or telephone their helpline on 0845 601 3321.
Contact: John Andrews (Tel: 0844 579 6700 Fax 0844 579 6701)