How is pension back pay taxed?
Discussion
Can anyone help with a pension tax query?
My father is about to claim his (final salary) pension, which will include over two years worth of back pay, because, it transpires, he could have started taking this particular pension more than two years ago.
This back paid lump sum is going to push him into the 40% tax bracket.
Will the back pay be taxed at 40%, even though it should really have been taxed at only 20% if he had begun claiming it at the earliest opportunity?
Is there a mechanism for reducing the bill, or provision for this circumstance on the self assessment form?
I've tried to google this question, but I haven't read anything that covers this.
We will be making an appointment with pensionwise etc before committing to any decisions.
Many thanks for any advice.
My father is about to claim his (final salary) pension, which will include over two years worth of back pay, because, it transpires, he could have started taking this particular pension more than two years ago.
This back paid lump sum is going to push him into the 40% tax bracket.
Will the back pay be taxed at 40%, even though it should really have been taxed at only 20% if he had begun claiming it at the earliest opportunity?
Is there a mechanism for reducing the bill, or provision for this circumstance on the self assessment form?
I've tried to google this question, but I haven't read anything that covers this.
We will be making an appointment with pensionwise etc before committing to any decisions.
Many thanks for any advice.
I can't answer your question directly but here are some other thoughts:
Normally when a pension is commenced at later year than the normal retirement date, it starts at a higher level (maybe 4-5% higher). Is this an option instead of backpay?
Was it the pension providers fault that the pension was paid late? If so, maybe they can offer a solution eg. spread the payments over 2 tax years.
Normally when a pension is commenced at later year than the normal retirement date, it starts at a higher level (maybe 4-5% higher). Is this an option instead of backpay?
Was it the pension providers fault that the pension was paid late? If so, maybe they can offer a solution eg. spread the payments over 2 tax years.
How has the “two years’ worth pf back pay arisen”? Is it because:
1. For some reason he did not claim the pension to be paid as at its due date, and if so why did this happen?
2. Did the administrator of the pension scheme somehow not be able to pay the pension from the due date, maybe because he could not be located?
3. Did he decide not to retire and have the pension paid from the due date, and instead he deferred retirement/payment until now?
4. Some other reason?
R.
1. For some reason he did not claim the pension to be paid as at its due date, and if so why did this happen?
2. Did the administrator of the pension scheme somehow not be able to pay the pension from the due date, maybe because he could not be located?
3. Did he decide not to retire and have the pension paid from the due date, and instead he deferred retirement/payment until now?
4. Some other reason?
R.
First, you also need to be clear in your terminology. Back dated PAY can't be back dated pension. I assume you mean back dated pension payments based on the rest of your post. I mention this in case you talk to HMRC to start a claim and they get confused resulting in them rejecting the claim.
In principle arrears of pay are deemed to be taxable as if they have been paid at the right time.
See here;
https://www.gov.uk/hmrc-internal-manuals/paye-manu...
and here
https://www.gov.uk/hmrc-internal-manuals/employmen...
Whilst these links relate to back dated pay and not a pension, I'm struggling to see any difference if the Pension Company has made a mistake in not paying the pension.
However, if the delay is due to your father (I think ignorance by him of when the pension was due will not be considered the payer's fault) the pension will be taxed as received in one tax year.
What will happen in practice is, the pension company will pay a lump sum and tax this accordingly, i.e. all received in one tax year. Your father will then need to claim the over paid tax back. This will have to be a separate claim to his self assessment as, with regard to this issue, his SA return only covers one tax year.
In principle arrears of pay are deemed to be taxable as if they have been paid at the right time.
See here;
https://www.gov.uk/hmrc-internal-manuals/paye-manu...
and here
https://www.gov.uk/hmrc-internal-manuals/employmen...
Whilst these links relate to back dated pay and not a pension, I'm struggling to see any difference if the Pension Company has made a mistake in not paying the pension.
However, if the delay is due to your father (I think ignorance by him of when the pension was due will not be considered the payer's fault) the pension will be taxed as received in one tax year.
What will happen in practice is, the pension company will pay a lump sum and tax this accordingly, i.e. all received in one tax year. Your father will then need to claim the over paid tax back. This will have to be a separate claim to his self assessment as, with regard to this issue, his SA return only covers one tax year.
Thanks for the advice given.
The reason it wasn't claimed is because it's a teacher's pension. My father stopped teaching in 2017 but continues to do other paid work. Due to health issues, he now wants to begin claiming on the teacher's pension, and they said since he stopped teaching in 2017, as far as they are concerned, this is his retirement date, so they owe him for pension since the day he stopped teaching.
The reason it wasn't claimed is because it's a teacher's pension. My father stopped teaching in 2017 but continues to do other paid work. Due to health issues, he now wants to begin claiming on the teacher's pension, and they said since he stopped teaching in 2017, as far as they are concerned, this is his retirement date, so they owe him for pension since the day he stopped teaching.
Since he wasn't claiming the Pension I fail to see how he could offset against previous tax years. He could reach an agreement, even if it's increase the monthly pension, in the short term for a few years, that benefits both parties.
As an aside I had a final salary scheme pension that was based on the best of my final three years. When I was working that out, I discovered that I had been underpaid for several years. This led to a significant payment in the final year which would have massively increased my pension. Somehow this could be offset pro rata so it's unfair that your father should not have some way to offset his tax, even if it is his responsibility.
As an aside I had a final salary scheme pension that was based on the best of my final three years. When I was working that out, I discovered that I had been underpaid for several years. This led to a significant payment in the final year which would have massively increased my pension. Somehow this could be offset pro rata so it's unfair that your father should not have some way to offset his tax, even if it is his responsibility.
Graveworm said:
Since he wasn't claiming the Pension I fail to see how he could offset against previous tax years. He could reach an agreement, even if it's increase the monthly pension, in the short term for a few years, that benefits both parties.
As an aside I had a final salary scheme pension that was based on the best of my final three years. When I was working that out, I discovered that I had been underpaid for several years. This led to a significant payment in the final year which would have massively increased my pension. Somehow this could be offset pro rata so it's unfair that your father should not have some way to offset his tax, even if it is his responsibility.
Agree with your first statement about not being able to claim back years as it was the father's decision not to claim his pension and, I'd be very surprised if the pension scheme allowed some sort of agreement to spread it over a number of years to avoid tax.As an aside I had a final salary scheme pension that was based on the best of my final three years. When I was working that out, I discovered that I had been underpaid for several years. This led to a significant payment in the final year which would have massively increased my pension. Somehow this could be offset pro rata so it's unfair that your father should not have some way to offset his tax, even if it is his responsibility.
Your backdated example is covered under the legislation previously cited.
Is it unfair the father can't do this? Interesting proposal to allow it to happen.
I assume the reason you can't chose to take backdated payments in different tax years is to stop a form of tax avoidance. I guess they think if they let someone pick and choose in which tax year to get paid they'll lose tax revenue and they're never going to allow that.
If allowed, higher/est rate taxpayers could defer pension payments to a year in which they are basic rate payers, thus saving what could be considerable amounts of income tax. Would this affect many people, who knows?
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