PAYE tax calculations – pensioner problems

Published on 7 December 2010

HMRC’s ‘automatic reconciliation’ of individuals’ PAYE records continues, with tax calculations for 2008/09 and 2009/10 landing on doormats. In this article, we outline some issues to look out for with a particular focus on pensioners, and give you an update on typical cases we have seen so far.

We have previously provided guidance on what to do if you receive a PAYE tax calculation (‘P800’). Now that a few more weeks have passed, we are still concerned at the variety of issues emerging which might mean your P800 tax calculation is incorrect or it should be challenged.

From the first trial run of calculations it was clear that many pensioners were being caught up in this process. With the help of TaxHelp for Older People (a charity offering free tax advice to older people with a net household income of £17,000 or less) we then provided a sample of cases to HMRC for review.

Whilst HMRC have not agreed these cases set any precedents, several illustrate common problems. You might therefore find it useful to read the case outlines and the outcome in each. You will find them in a separate document at the end of this article. Of course there can be no guarantee of success, but if you recognise your circumstances as similar, you might feel encouraged to keep challenging HMRC.

Estimated figures

As previously stressed, do not assume that the figures shown on your P800 are correct. Although there will be no indication on the calculation itself, some of the amounts might be estimated using out of date information or assumptions HMRC have on file. We have asked HMRC to identify all estimates on these calculations, but they have yet to confirm that they will do so.

It might surprise you to learn that even your state pension might be incorrect (see also more on state benefits below). For instance, it is not unknown for HMRC to:

  • use a full year’s state pension where you only started to receive it part way through the tax year;
  • use a state pension figure bearing little or no resemblance to reality (see ‘Mr A’ in the appendix);
  • include a state pension, even where you have deferred taking it;
  • use the wrong state pension figure for, say, a widow when her entitlement changes as a result of her husband’s death.

Problems can also occur where, for example, you have completed HMRC’s pre-retirement form P161, on which you provided estimated income details (including savings interest) so that HMRC could issue tax code(s) for your pensions.

But now it seems that estimated income provided for the purpose of coding has been used by HMRC for automatic reconciliations and issuing tax calculations in some cases.

This problem can affect anyone where HMRC have estimated income, but can be illustrated particularly well in the following pensioner case referred to us.

 

Example

A pensioner, aged 90, usually completes repayment claims each year with the help of a tax adviser. But for 2009/10, the automatic reconciliation process issued to him a P800 together with a tax repayment.

His adviser found that all investment income was estimated and the repayment greatly overstated.

In this case, you could argue that the pensioner was lucky as he had an adviser to help him. But there is a further question: the adviser has incurred time and effort but feels it is unfair to charge his client for sorting out a problem of HMRC’s making. Should that agent now therefore complain to HMRC and seek recompense? If the client were to foot the bill, it would run counter to HMRC’s ‘Your Charter’ objective of keeping the costs of dealing with them as low as possible.

State benefits

Some P800 calculations have also included non-taxable state benefits in error. If you are in receipt of benefits, do check whether or not they are taxable – use our checklist to guide you – and make sure any non-taxable sources are excluded.

If you are not sure what your benefits consist of, get in touch with the Department for Work and Pensions (contact details should be given on past correspondence) to make sure. It can be hard to distinguish how much you should be paying tax on where, for example, you get non-taxable attendance allowance but this is paid into your bank together with your taxable state pension.

We have asked the Department for Work and Pensions to identify the separate benefits on people’s bank statements but they say that their computers cannot cope.

Married couple’s allowance

Married couple’s allowance (MCA) is now only due where at least one spouse or civil partner was born before 6 April 1935. If that does not apply to you, skip straight to the conclusion below.

Many PAYE coding problems with MCA have been discovered in the past, including a basic failure by HMRC to ‘restrict’ the allowance in the coding so that relief is only given at 10%. The pensioner who fails to spot this might be given tax relief of 20% for the allowance and therefore not pay enough tax by several hundred pounds.

For example, the allowance for the 2010/11 is £6,965. If this full amount is included in a basic rate taxpayer’s code, they will get tax relief at 20%, ie £6,965 x 20% = £1,393. However relief is only due of £696.50, that is, at 10%.

Also, unlike the ordinary personal and age-related allowances, MCA can be transferred to the other spouse. But it seems this could be missed in the current reconciliation process.

If you are entitled to the MCA, do therefore be careful to ensure that:

  • it is allocated to you/your spouse or civil partner
  • any election you have previously made to transfer the basic allowance is reflected in the calculations
  • any surplus allowance is transferred to your spouse or civil partner if they can use it to reduce their tax
  • it is calculated correctly on the P800, particularly if your income is over the threshold where age allowances start to be reduced
  • it is correctly restricted in your current coding so that you only receive 10% relief (the MCA shown should be £3,483, not the full £6,965).

Conclusion

We are seeing some evidence of HMRC inconsistency of treatment in common situations. If you are refused a write-off and your situation is similar to the cases illustrated below then ask HMRC for a detailed justification.

For now, our previous advice stands:

  • check your calculation,
  • contact HMRC if you are not sure about any of the figures and
  • challenge it where you feel there are valid reasons to do so.

But take care! When contacting HMRC do not to ask them to review years before 6 April 2008 unless you are absolutely confident that you paid too much tax for those years.

Case studies

(07-12-2010)

Contact: Kelly Sizer (please use form at http://www.litrg.org.uk/ContactUs)