HM Revenue and Customs (HMRC) has issued detailed guidance explaining the operation of tax on the state pension, highlighting how rules vary depending on age and payment schedules. This clarification comes as millions of state pensioners prepare for an upcoming increase in their payments due to the triple lock policy.
Tax Code Adjustments and Triple Lock Increases
According to information on the Government website, HMRC can alter an individual's tax code if "you need to pay a different amount of tax." One specific scenario where this occurs is when "your weekly state pension amount changes." The triple lock policy guarantees that state pension payments rise each April, based on the highest of three figures: the rise in average earnings, the rate of inflation, or 2.5 percent. This April, payments will increase by 4.8 percent, with the rise in earnings being the highest figure from last year.
An HMRC spokesperson stated, "We adjust tax codes based on information from DWP to help pensioners pay the right tax. 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 noted that most pensioners who pay tax are enrolled in the Pay As You Earn system.
Calculation Methods for Tax Codes
In cases where state pension payments increase, HMRC calculates the annual state pension by adding one week at the previous rate and 51 weeks at the new rate, then adjusting the tax code accordingly. This method ensures "most pensioners pay the right amount of tax in real time." HMRC has pointed to further guidance on the Government website regarding uprating services and calculations, which explains that the Department for Work and Pensions (DWP) operates an Uprating Service to automatically adjust state pensions and benefit deductions as payments rise.
For individuals who reached state pension age on or after April 6, 2010, their pension pay day, from Monday to Friday, is determined by the last two digits of their National Insurance number. The guidance clarifies, "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." The CY+1 code refers to the upcoming financial year, with CY representing 'current year.'
Payment Schedules and Tax Implications
For those who reached state pension age before April 6, 2010, the DWP pays the state pension on a fixed pay day. The guidance states, "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 when April 6 falls on a weekday after Monday, these pensioners will only receive the new rate for 51 weeks.
HMRC therefore uses one of two methods to calculate tax codes:
- 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.
Cautionary Notes and Further Guidance
The guidance also includes a caution: "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." Complete guidance is available on the Government website, providing essential information for pensioners navigating tax changes.
This detailed explanation from HMRC aims to ensure transparency and accuracy in tax payments as state pensioners benefit from the triple lock increase, helping them manage their finances effectively during these adjustments.
