Pension warning as 'common mistake' leaves Britons over-paying on tax
If people fail to contact HMRC, it could leave them paying more tax than they need to
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Those reaching state pension age are being warned that they could end up paying the wrong amount of tax if they fail to tell HMRC about their state pension.
It comes after Age UK found that one of the top 10 common tax mistakes people make is forgetting to tell HMRC that they are about to retire, causing problems further down the line.
The charity encouraged people to make sure their tax office knows in good time if they expect to start receiving a pension in the next few months so that they can sort out their tax code, and this is especially vital for people who are self-employed.
HMRC will usually contact people to explain how their individual tax code has been worked out, which is calculated based on their tax-free Personal Allowance and income they have not paid tax on.
HMRC will usually contact people to explain how their individual tax code has been worked out
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They also consider the value of any benefits from one’s job such as a company car.
The Low Incomes Tax Reform Group explained that one of the main causes for tax code problems is that the DWP does not operate Pay As You Earn on their state pension.
Their website states: “This forces the PAYE system to collect tax on two sources of income through one tax code.
“For example, you may pay tax on both your state pension and an occupational pension through the tax code issued for your occupational pension.
“In the first year, you get your state pension, you will more than likely receive payment for only part of the year.
“HMRC will normally include a full year's pension in your coding notice and then tell your employer or pension payer to use a special type of code, called a week 1 or month 1 code, to make sure that you only pay the right amount of tax.”
It should also be noted that people do not get a form P60 after the end of each tax year for their state pension, so they must keep their own records of their state pension income.
If people start to receive more than one occupational or personal pension, they will all need their own tax code.
People risk overpaying in tax if they do not take the advise
PABritons are urged to check each of them are correct to avoid overpaying or underpaying.
David Woodward, managing director of Woodward Financials told the Express: “When approaching retirement, it is always a good idea to request a BR19 state pension forecast which can be done online.
“Your pension provider is likely to inform HMRC when you start taking pension benefits but don’t expect your employer to do this on your behalf.
“Most employers will just issue a P45 once leaving the company as many people may continue to work in a reduced capacity with another employer in later life."