Taxation of small pensions
Do you receive a pension, perhaps from an insurance company or a pension scheme run by your former employer? If you do then you should read this.
All of these pensions, however large or small, should be paid under Pay As You Earn (PAYE) which means that if there is any tax to pay, it should be taken off when the pension is paid to you. The vast majority of pensioners are already paid in this way, but some are still being paid under old arrangements which were agreed between pension providers and the Inland Revenue predecessor to HM Revenue & Customs (HMRC).
This has resulted in a number of pensions being paid tax-free, even when some tax should have been paid. It is likely that affected pensioners are not aware of the arrangements, or even that they should be paying some tax.
However, HMRC need to make sure that all pensioners are treated fairly and have now told providers that the old arrangements have to end. HMRC will be bringing any untaxed pensions into tax from the current tax year (2009-10).
HMRC have already asked Pension Providers to make sure that all new pensions which have started since 6 April 2007 are taxed correctly, and also to send details of all pensions which began before that date and which are being paid tax-free under an old arrangement.
If you are receiving a pension which started before 6 April 2007 and no tax is being taken off, nothing will normally change until after April 2010 when the current tax year ends. Your provider will then send details of your pension so that it can be checked to see if it can continue to be paid tax-free or if there is some tax to pay. If any more information to help HMRC work things out is needed, HMRC will get in touch with you at that time, so there is nothing for you to do at the moment.
If you are concerned as to whether you might be affected by this change, the following details will help you decide.
You will not be affected if any of the following apply to you:
- You are receiving a pension or pensions and you already complete a Self Assessment Tax Return every year.
- Your pension or pensions are already being paid under PAYE and taxed. You will know if a pension is being taxed because the provider will send you a tax statement (P60) after 5 April each year showing how much pension you have received and how much tax has been paid.
- If you are 65 or over but not yet 75 and your estimated taxable income for the year from 6 April 2009 to 5 April 2010 from all sources, including state retirement and other pensions, is less than £9,490 (this is your tax-free allowance).
- If you are 75 or over and your estimated taxable income for the year from 6 April 2009 to 5 April 2010 from all sources including state retirement and other pensions, is less than £9,640 (this is your tax-free allowance).
- If you are under 65 and your estimated taxable income for the year from 6 April 2009 to 5 April 2010 from all sources, including any state retirement pension (if you are female) and other pensions, is less than £6,475 (this is your tax-free allowance).
You may be affected if:
- you receive a pension which is not being taxed, the untaxed pension is not included in the tax code applied to your main source of income or your estimated taxable income exceeds the relevant limit set out above
What should I do if I think I am affected?
Please do not worry. You do not have to do anything at the moment. HMRC will be trying to identify those affected using the details it now has for the year to April 2008. HMRC will then write explaining how in general terms this change will affect you.
Once HMRC have received details of your pension from your provider in April 2010 it will check to see if it can still be paid in full, or if you may have some tax to pay. If HMRC needs any more information it will contact you at that time.
What will happen if I have some tax to pay?
If your total income from all sources, including any state pension, is above your tax free allowance HMRC will let you know how and when you will have to start paying any tax due. You will be told about this in a Pay As You Earn (PAYE) coding notice (P2) which is sent out to you once HMRC have received and reviewed the pension details sent by your pension provider.
For most people this should mean that their pension will be taxed from 2009-10 onwards and any underpayment of tax for that year will normally be collected in 2011-12 through PAYE month by month.
HMRC will not normally ask anyone to pay any tax which should have been paid on a pension before April 2009. This would only happen in exceptional circumstances, for instance if someone had deliberately tried to avoid paying the tax.
HMRC will not expect anyone to pay any tax due in a lump sum unless they ask to do so. Instead it will be collected under PAYE over a longer period, normally a year. But if this causes hardship other special arrangements can be made to help and you should contact HMRC at that time.
What happens if I am already paying too much on my pension?
If you think that you are paying too much tax HMRC can soon check and let you know. You will need to telephone or write to HMRC to say how much income you have and how much tax has been taken off. If you do not have any letters from HMRC, you will find your tax reference number on the Tax certificate (P60), or your pension payslip or other letters given to you by your pension provider.
