Is HMRC overtaxing me on my state pension?

Can you help me because I don’t know where to turn? I turned 66 last week and had already been told my weekly pension would be £183.62.

I expect to pay tax on this as I already receive two small working pensions of around £16,000 a year.

I received an email telling me that my tax codes had changed, so I checked online and there is a clear error. My tax codes for my existing pensions have been reduced for this year by the equivalent of a full year’s state pension income of £9,548.

Over the next three months of this tax year I will receive £2,911 in state pension, but HMRC say they are acting on the figures provided by the DWP and there is nothing they can do.

DWP says they only notify HMRC of the start date and weekly payment so I asked HMRC again and they hold the line saying this happens to everyone.

Retirement finances: I have just turned 66 and HMRC are planning to overtax me on my state pension – how fair is that?

It certainly can’t be fair that they can knowingly take an extra £1,327 from me over three months only to realize they have overcharged me and at some point issue a refund.

If that’s right and that’s how it is, why am I only finding out now? Nowhere in anything I have read does he warn of such a situation.

I really don’t want to wait for a refund and I could indeed do with the £450 a month in my account from January. Is there any help or explanation for this absurd situation that you are able to give?

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Steve Webb responds: When I first read your situation (and that of another This is Money reader with the exact same problem), my first reaction was that a mistake had indeed been made.

However, after dealing with your case with HMRC, it looks like you are being taxed correctly, but it hasn’t been explained very well.

So hopefully I can shed some light on what’s going on, especially to help other people who are confused about what happens to their tax code the year they start collecting their state pension.

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To recap the basics, most people have a standard non-taxable personal allowance of £12,570 a year. This is the amount you can receive in income, pensions and other forms of taxable income before any tax is due.

A “tax code” is a way of telling your employer or pension fund how much tax to deduct at source before paying your salary or pension.

In a simple case where you have a company pension and no other taxable income, your pension scheme will receive a tax code which will cause them to subtract one-twelfth of your £12,570 allowance from your monthly pension and deduct the tax income on what’s left.

When you have two sources of taxable income – for example, a state pension and a company pension, things get a little complicated.

What happens in practice is that HMRC first looks at your state pension. To simplify matters, we will assume for the moment that you are in receipt of a state pension for the full financial year.

In most cases, the amount of state pension people receive will be less than their personal allowance. So the practice is that state pensions are paid in full (without tax deduction), but your tax code is reduced by the amount of your state pension.

What remains is your unused tax allowance. This residual figure is then turned into a tax code which is sent to your company pension scheme and they then deduct income tax on anything over your residual personal allowance.

Now let’s move on to your situation, in which your state pension comes into effect during the year.

What HMRC has done is include the full 12 month value of your state pension in your tax code calculation, even though you won’t get as much in the current financial year.

Naturally, this made you worry about paying too much tax.

In response, HMRC said that although it has entered the full amount of the annual state pension into the tax code, and that reduces the non-taxable figure sent to your private pension providers, that amount not Lower taxable is *only* applied to monthly payments for the remainder of the fiscal year.

In other words, during the months before your state pension starts, you have received your full personal allowance and the lower personal allowance only comes into effect for the period when your total taxable income is higher. .

This will result in the correct amount of tax deducted for the year as a whole.

You said you understand this explanation but it would have been better if you had received the explanation before your tax code was removed. A similar comment was made by the other reader who contacted me about this. I have referred this item to HMRC.

In response, HMRC said: ‘Customers who start to withdraw their state pension within a tax year can be reassured that although their tax code may look different, it is calculated correctly.’

“As explained in the letter we send to customers, we are adjusting their personal allowance to ensure they pay the correct tax and don’t end up with a higher bill the following year.”