However, the taxpayer is concerned they will owe tax for the 5th April 2021 tax year as their coding notices for the private pensions have been worked out on the basis they will be in receipt of 52 weeks of state pension, but they actually received 53 weeks of state pension.
Do I need to bring them into self-assessment for what appears to be a small tax under payment due to an extra week of state pension?
Taxation of State Pension
The state pension, according to ITEPA 2003 578, is taxable on the ‘benefit or allowance accruing in that year irrespective of when any amount is actually paid’. HMRC guidance at EIM74600 confirms that state pension is caught under section 577 ITEPA 2003, but it is only at EIM76005 that hints at the difference between entitlement and payment. This provides an example stating that a taxpayer who is paid 4-weekly may receive 14 payments in a year (equivalent to 56 weeks benefit) but for income tax purposes they only remain taxable on the 52-week entitlement.
As such it is recommended that you ask the taxpayer to review the letter ‘About the general increase in benefits’ that the Pension Service would have sent prior to the 6th April 2020 to find the weekly entitlement amount for the 5th April 2021 tax year. If this letter has been lost, then the taxpayer can call the Pension Service on 0800 731 0469 to confirm the figure.
Obligation to notify for self-assessment and collection of tax
If, on review there is an under payment, as all sources of income are under PAYE, TMA 1970 s7(5) excuses a taxpayer under PAYE from notifying for self-assessment. As such it seems likely that HMRC may issue a P800 or simple assessment to collect any under paid tax and, if small, code this out in the 2021/22 tax year – see tax overpayments and underpayments on GOV.UK. Strictly speaking each taxpayer has an obligation to ensure that their tax is correct and if an underpayment is noticed they should contact HMRC directly to correct the tax.
PAYE95060 notes that HMRC should have received the information from the Department of Work and Pensions (DWP) electronically. Therefore, HMRC have the correct information to notify coding for the private pension scheme to ensure tax due could be correctly collected under PAYE in the right year.
Remember that your client can check to see if HMRC have already dealt with this issue by accessing their Personal Tax Account.
If after these notifications from the DWP and the taxpayer HMRC delay in trying and collect the tax arears by more than 12 months from the end of the 5th April 2021 tax year they ‘may’ be able to claim relief under ESC A19. This would allow a taxpayer to appeal to HMRC to cancel the collection of under paid tax due to HMRC failure to make proper and timely use of information supplied. However, I use the term ‘may’ as there are several points that need to be proven. Details regarding the ESC A19 can be found under PAYE95000.
I would recommend reviewing the Pension Service statement to confirm what State Pension the taxpayer was entitled to, and hence taxed, for the 5th April 2021 tax year. If this does lead to an underpayment this would not trigger an obligation for the taxpayer to notify for self-assessment. But if no P800 has been triggered or the under payment not coded into 2021/22 it seems, as this under payment has been discovered, the taxpayer should notify HMRC themselves of the error. If, even after prompting, HMRC delay by over a year to assess for the tax there might be cause to appeal the collection of the underpaid tax.
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