PAYE76086 - PAYE operation: pensioners: coding of state pension / benefits in the first year

The ‘Pensions’ screen in IABD stores information about the state pension / benefits.

The amount of state pension / benefits is recorded as an actual or estimated amount. PAYE130065 ‘Pensions’ gives more information about pensions recorded in IABD.

Tax code calculation
Automatic coding of state pension

Tax code calculation

When NPS calculates the tax code for the first year in which the state pension / benefits are received the following rules will be applied

• State pension / benefits will not be calculated before the date of first payment
• Where the individual is liable to tax, NPS will check the date of first payment prior to calculating the new tax code
• When state pension / benefits start to be paid, NPS will calculate the adjusted net income for age-related purposes and check if the individual is liable to tax, before calculating the amount of state pension / benefits to be coded
• Where the individual is liable to pay tax and the code is calculated within one month after the date of the first payment, NPS will include the annual amount due in the CY tax code. The code will be operated on a non cumulative week 1 / month 1 basis without a potential underpayment
• Where the individual is liable to pay tax and the code is calculated more than one month after the date of the first payment, NPS will include the actual amount due in the CY tax code. The code will be operated on a non cumulative week 1 / month 1 basis with a potential underpayment
• Where the individual is not liable to tax, NPS will include the actual amount due in the CY tax code. The code will be operated on a cumulative basis. Consider whether previous pay and tax details should be included
• Where the individual was previously not liable to tax but because of starting to receive state pension / benefits is now liable to tax, NPS will include the actual amount due in the CY tax code. The code will be operated on a non cumulative week 1 / month 1 basis with a potential underpayment. This rule will also be applied by NPS where there were no existing estimated earnings on the individuals record and an operator has now estimated earnings

Where the actual amount of state pension / benefits are included in the CY tax code, the benefit will be calculated automatically as follows

• Calculating the number of complete weeks from the start of the benefit to the end of the tax year (for example, number of days divided by 7, rounded down)
• Multiplying the weekly amount of state pension by the number of complete weeks

In all cases NPS will include an annual amount in the CY+1 code.

Note: Where you are including state pension / benefit for the first time after the annual uprating in January then an advisory message will be displayed directing you to recalculate the CY+1 code. In these cases use the P242 chart to estimate the CY+1 amount and amend the record.

In cases where incapacity benefit has been paid up to and including the day before state pension/benefits commences, you must apportion the incapacity benefit and enter the actual incapacity benefit and actual state pension / benefits. Where the net coding allowances are increased, issue the code on a cumulative basis.

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Automatic coding of state pension

NPS will perform a ‘State Pension Age’ (SPA) automated scan to identify records where an individual has reached state pension age between one month and six months ago.

The basic amount of state pension, in accordance with chart P242, will be automatically coded when the following conditions are also met

• The individual’s account does not have an amount of state pension already included within the IABD record for CY
• The individual’s account does not have the ‘State Pension Deferred’ indicator set
• The individual has a live, ceased or potentially ceased primary employment in CY
• The ‘Deceased’ indicator is not set

Where these conditions are met, the following updates will be made

Employment summary

An automatic review of Employment Summary will be made prior to the coding of the basic state pension. Where a live primary or secondary employment record is held for Incapacity Benefit (This text has been withheld because of exemptions in the Freedom of Information Act 2000), Employment and Support Allowance (This text has been withheld because of exemptions in the Freedom of Information Act 2000), or with the JSA indicator set, the employment record will be potentially ceased.

IABD - Taxable social security benefits

Where the latest tax code includes a deduction for Incapacity Benefit, Employment and Support Allowance or Job Seeker’s allowance and an ‘End Date’ is not held in IABD, the following updates will be made

• The start date for the state pension will be entered as the date the customer reached ‘state pension age’ see PAYE76095 
• The state pension ‘Amount’ will be calculated by multiplying the weekly amount of basic state pension by the number of complete weeks from the start date to the end of the tax year
• The ‘Frequency of Payment’ will be recorded as ‘Annual’
• The ‘Estimated’ benefit indicator will be set

Trigger tax code

Following updates to IABD a tax code calculation will be triggered. Where Annual Coding has already taken place a CY+1 tax code calculation will be triggered to include a deduction for a full year’s basic state pension.

Contact History

A Contact History note will be added to record ‘Basic state pension added’. The ‘Contact Channel’ will show ‘SPA AUTOMATED SCAN’.

Note: In most cases the state pension will be coded following receipt of forms P161 and / or P46(DWP). Where there has been a delay in processing these forms, automatic coding of state pension may have occurred. As only the basic amount of state pension will have been coded, you should update IABD to reflect the amount of state pension advised by the individual or provided by DWP.

Deferred state pension

Where state pension has been automatically coded and you are advised that the individual has deferred their state pension, you should

• Apologise and explain that state pension has been automatically coded as they have reached state pension age and they have not yet returned form P161
• Refer to guidance at PAYE76125 

Work Management Item 136

Work Management Item (WMI) 136 will be generated following the automated coding of state pension. The date used to populate the WMI will be the date of the SPA automated scan. The WMI will allow staff to issue form P173, to ensure the record is included in the DWP uprating service. See PAYE76100.

To process WMI136 follow the guidance in the SPD WI 136, which is available on the Customer Operations Guidance Gateway.