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HMRC internal manual

PAYE Manual

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HM Revenue & Customs
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PAYE operation: pensioners: coding of state pension / benefits in the first year

The ‘Pensions’ screen in IABD stores information about the state pension / benefits.

The amount of state pension / benefits is recorded as an actual or estimated amount. PAYE130065 ‘Pensions’ gives more information about pensions recorded in IABD.

Tax code calculation

When NPS calculates the tax code for the first year in which the state pension / benefits are received the following rules will be applied

  • State pension / benefits will not be calculated before the date of first payment
  • Where the individual is liable to tax, NPS will check the date of first payment prior to calculating the new tax code
  • When state pension / benefits start to be paid, NPS will calculate the adjusted net income for age-related purposes and check if the individual is liable to tax, before calculating the amount of state pension / benefits to be coded
  • Where the individual is liable to pay tax and the code is calculated within one month after the date of the first payment, NPS will include the annual amount due in the CY tax code. The code will be operated on a non cumulative week 1 / month 1 basis without a potential underpayment
  • Where the individual is liable to pay tax and the code is calculated more than one month after the date of the first payment, NPS will include the actual amount due in the CY tax code. The code will be operated on a non cumulative week 1 / month 1 basis with a potential underpayment
  • Where the individual is not liable to tax, NPS will include the actual amount due in the CY tax code. The code will be operated on a cumulative basis. Consider whether previous pay and tax details should be included
  • Where the individual was previously not liable to tax but because of starting to receive state pension / benefits is now liable to tax, NPS will include the actual amount due in the CY tax code. The code will be operated on a non cumulative week 1 / month 1 basis with a potential underpayment. This rule will also be applied by NPS where there were no existing estimated earnings on the individuals record and an operator has now estimated earnings

Where the actual amount of state pension / benefits are included in the CY tax code, the benefit will be calculated automatically as follows

  • Calculating the number of complete weeks from the start of the benefit to the end of the tax year (for example, number of days divided by 7, rounded down)
  • Multiplying the weekly amount of state pension by the number of complete weeks

In all cases NPS will include an annual amount in the CY+1 code.

Note: Where you are including state pension / benefit for the first time after the annual uprating in January then an advisory message will be displayed directing you to recalculate the CY+1 code. In these cases use the P242 chart to estimate the CY+1 amount and amend the record.

In cases where incapacity benefit has been paid up to and including the day before state pension/benefits commences, you must apportion the incapacity benefit and enter the actual incapacity benefit and actual state pension / benefits. Where the net coding allowances are increased, issue the code on a cumulative basis.

Automatic coding of state pension from automated daily interface from DWP

From 23 July 2012, NPS (National Insurance and PAYE Service) will receive new and revised state pension award notifications through an automated daily interface feed from the DWP PSCS (Pension Strategy Computer System).

Where the individual is successfully matched to NPS the following updates will be made.

Employment summary

An automatic review of Employment Summary will be made prior to the coding of state pension. Where a live primary or secondary employment record is held for Incapacity Benefit (IB) (This content has been withheld because of exemptions in the Freedom of Information Act 2000) , Employment and Support Allowance (ESA) (This content has been withheld because of exemptions in the Freedom of Information Act 2000) , or with the JSA indicator set, the employment record will be potentially ceased if

  • The state pension date of entitlement is in CY
    Or
  • An end date of the day before the date of entitlement where state pension commenced in CY-1 or earlier

Note: If no live employment source remains after cessation of an IB/ESA or JSA employment and the annual amount of state pension is above the basic personal allowance, work item 439 will be created, see ‘Work Management 439’ heading below for further details.

IABD - Taxable Social Security benefits

Where IABD holds a value greater than zero for IB, ESA or JSA and an end date is not held in IABD, the following updates will be made

  • Update the end date of IB, ESA or JSA with the day before the start date of state pension
  • Apportion the amount of IB, ESA or JSA from the start date or 06 April if no start date is present up until the end date (number of days/365 (existing value held)) and update CY+1 value held to zero where a carried forward value is held

Where IABD holds a value greater than zero for Bereavement Benefits (where lsited as ‘Other Benefits’) and an end date is not held on IABD, the following updates will be made

  • Update the end date of ‘Other Benefits’ with the day before the start date of state pension
  • Apportion the amount of ‘Other Benefits’ from the start date or 6 April if no start date is present up until the end date (number of days/365 (existing value held)) and update CY+1 value held to zero where a carried forward value was held

Note: In April 2015 a new field ’Bereavement Allowance’ was introduced. Where bereavement benefit is recorded here an end date will be present.

IABD - Pensions - ‘New’ Award

State pension will be populated onto IABD as follows where

Date of entitlement is earlier than CY

Payment Frequency = Annual

Estimated National Insurance Benefit = Ticked

Start Date = Date Of Entitlement

Amount = State Pension amount calculated

Date of entitlement is in CY

Payment Frequency = Weekly

Actual National Insurance Benefit = Ticked

Start Date = Date of Entitlement

Amount = Total Pension payable amount

The current coding rules will determine if the actual or annual amount of state pension will be included in the tax code.

CY+1 will be updated differently depending on whether an uprated weekly award has been provided by DWP and/or whether annual coding has run.

The deferred indicator will be removed where it has been set.

IABD - Pensions - ‘Revised’ Award

State pension will be populated onto IABD as follows where

Date of entitlement is in CY or earlier than CY

Payment Frequency = Annual

Estimated National Insurance Benefit = Ticked

Start Date = Blank

Amount = State Pension amount calculated

Trigger re-reconciliation

Where the date of entitlement is in CY-1 or earlier and reconciliation has already taken place, a further reconciliation will be triggered. A tax calculation will only be issued for an ‘in date’ tax year which is

  • CY-6 or later where the result is a repayment
  • CY-4 or later where the result is an underpayment

Trigger tax code calculation

Following updates in IABD to CY tax code calculation will be triggered.

Where Annual Coding has already taken place a CY+1 tax code calculation will be triggered to include a deduction for a full year’s state pension.

A special note will be included on the P2 which tells the customer why their State Pension has been included in their tax code. ‘The Department for Work and Pensions has told us the weekly amount of state pension you receive.’

Contact History

A Contact History note will be added to record the ‘Date of Entitlement / Payable From date’ and the ‘Total Pension Payable (weekly) and Uprated Pension Payable (weekly). The Contact Channel will show ‘Interface In’ and Document Type will show ‘P46(DWP)’.

Work Management 439

Work Management Item (WMI) 439 will be created to deal with exceptions where the daily interface cannot update NPS as follows

  • No trace of individual from NINO DWP provided and annual state pension is above basic personal allowance
  • No trace of primary employment and annual SP is above basic personal allowance
  • Individual lives abroad and a live or ceased employment exists or existed in the last 6 years

Automatic coding of state pension where no state pension is present

NPS will perform a ‘State Pension Age’ (SPA) automated scan to identify Temporary Reference Number (TRN) records where an individual has reached state pension age between one month and six months ago.

Note: Where a NINO is identified, state pension will not be included on the record. This is because it will be assumed that the individual has deferred their state pension, as we should have received the award details on the new daily interface from DWP.

The basic amount of state pension, in accordance with chart P242, will be automatically coded when the following conditions are also met

  • The individual’s account does not have an amount of state pension already included within the IABD record for CY
  • The individual’s account does not have the ‘State Pension Deferred’ indicator set
  • The individual has a live, ceased or potentially ceased primary employment in CY
  • The ‘Deceased’ indicator is not set

Where these conditions are met, the following updates will be made

Employment summary

An automatic review of Employment Summary will be made prior to the coding of the basic state pension. Where a live primary or secondary employment record is held for Incapacity Benefit (This content has been withheld because of exemptions in the Freedom of Information Act 2000) , Employment and Support Allowance (This content has been withheld because of exemptions in the Freedom of Information Act 2000) , or with the JSA indicator set, the employment record will be potentially ceased.

IABD - Taxable social security benefits

Where IABD holds a value greater than zero for Incapacity Benefit (IB), Employment and Support Allowance (ESA) or Jobseeker’s Allowance (JSA) and an end date is not held in IABD, the following updates will be made

  • Update the end date of IB, ESA or JSA with the day before the start date of SPA date
  • Apportion the amount of IB, ESA or JSA from the start date or 6 April if no start date is present up until the end date (number of days/365 (existing value held)) and update CY+1 value held to zero where a carried forward value is held

IABD - Pensions

State pension will be calculated by multiplying the number of full weeks from the SPA date (PAYE76070) to 5 April by the basic weekly amount and will be included in IABD as follows where

Date of entitlement is earlier than CY

Payment Frequency = Annual

Estimated National Insurance Benefit = Ticked

Start Date = Date SPA reached

Amount = State Pension amount calculated

Date of entitlement is in CY

Payment Frequency = Weekly

Estimated National Insurance Benefit = Ticked

Start Date = Date SPA reached

Amount = State Pension amount calculated

CY+1 will be updated differently depending on whether annual coding has run

Trigger tax code

Following updates to IABD a tax code calculation will be triggered. Where Annual Coding has already taken place a CY+1 tax code calculation will be triggered to include a deduction for a full year’s basic state pension.

Note: NPS ‘Tax Code Details’ screen will show the total of all state pension/state benefits received but the P2 output will use the individual amounts from the IABD summary screen and include a relevant explanatory note for each type.

Contact History

A Contact History note will be added to record ‘Basic state pension added’. The ‘Contact Channel’ will show ‘SPA AUTOMATED SCAN’.

Deferred state pension

Where state pension has been automatically coded and you are advised that the individual has deferred their state pension, you should

  • Apologise and explain that state pension has been automatically coded as they have reached state pension age
  • Refer to guidance at PAYE76125

Work Management Item 136

Work Management Item (WMI) 136 will be generated following the automated coding of state pension for TRN records. The date used to populate the WMI will be the date of the SPA automated scan.

To process WMI136 follow the guidance in Action guide tax40194, which is available on the Customer Operations Guidance Gateway.