HMRC has clarified how tax on the state pension works (Image: Getty)
HMRC has pointed taxpayers to key guidance to explain how tax on the state pension works. Guidance on the Government website states that the taxman can change your tax code in the event that « you need to pay a different amount of tax ».
One of the examples it gives where this could happen is if « your weekly state pension amount changes ». Millions of state pensioners will soon see their state pension go up, thanks to the triple lock policy.
This measure ensures state pension payments go up each April, in line with whichever of three numbers is highest: the rise in average earnings, the rate of inflation or 2.5 percent. Payments will rise 4.8 percent this April as the rise in earnings proved to be the highest of the three figure last year.
HMRC was asked to clarify previously how a state pensioners tax code could change when the triple lock lifts payments. An HMRC spokesperson said: « We adjust tax codes based on information from DWP to help pensioners pay the right tax.
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« Anyone who thinks their tax code is incorrect can update their details on our app or via their online tax account, or contact our helpline if unable to go online. » The group also said that most pensioners who pay tax are in Pay As You Earn.
In this case, HMRC calculates how much state pension you get over the year by adding one week at your previous rate rate of state pension and 51 weeks at the new rate, and then adjusting your tax code to reflect this.
HMRC said that this calculation means « most pensioners pay the right amount of tax in real time ». The tax body was further asked to clarify exactly how this works.
HMRC responded saying there is « further guidance on the uprating services and calcultions » and pointed to some internal PAYE guidance on the Government website. The advice states that the DWP has an Uprating Service which ensures that state pensions and benefit deductions are « automatically revised » as payments increase.
For peple who reached state pension age on or after April 6, 2010, your pension pay day, from Monday to Friday, will be allocated based on the final two numbers of your National Insurance number.
The guidance explains: « There will be no increase in benefit during the first week in April and as a result, the Uprating Service will always calculate the CY+1 coding deduction based on one week at the old rate and 51 weeks at the new rate. » CY+1 refers to the coming financial year, with CY standing for ‘current year’.
For people who received state pension age before April 6, 2010, DWP pays your state pension on a fixed pay day. The guidance explains: « State pension is paid on a Monday, except for widow beneficiaries who receive their pension on a Tuesday. »
« As a result the Uprating Service will calculate the CY+1 coding deduction according to the day on which April 6 falls. This is because where April 6 falls on a week day after the Monday, these pensioners will only receive the new rate of state pension for 51 weeks. »
As a result, HMRC calculates your tax code based on one of two metrics. The guidance states:
- In years when April 6 falls on a Tuesday, Wednesday, Thursday or Friday, the Uprating Service calculates the coding deduction at 1 week at the old rate and 51 weeks at the new rate
- In years when April 6 falls on a Saturday, Sunday or Monday, the Uprating Service calculates the coding deduction at 52 times the new rate.
The guidance also has this warning: « You should be aware that there may be some instances where the amounts notified by the DWP are not representative of the true annual figure. Where a pensioner notifies you of a different figure, code the amounts advised by the pensioner. » You can read the full guidance on the Government website.
