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HMRC internal manual

Self Assessment Manual

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HM Revenue & Customs
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Returns: individuals returns: arrears of pension and pay

Notes:

1. This guidance relates to personal pensions. See the current instructions in the Employment Income Manual (EIM74000 onwards) for full details regarding entitlement and taxation of such payments
   
2. See the current instructions in the Employment Income Manual (EIM74600 onwards) for full details regarding entitlement and taxation of State Pension Guidance regarding arrears is at EIM76005
3. See the current instructions in the Employment Income Manual (EIM02530 & EIM42290) for details of entitlement and taxation of arrears of pay

Background

Payments of pension arrears covering a number of tax years are becoming increasingly common. For example, some former part-time employees are being given rights to retrospective membership of occupational pension schemes. As a result, those former part-time employees who have since retired may become entitled to a pension or an increased pension. Many will be entitled to arrears of pension for the period from their retirement date.

Taxable pension is the amount to which the pensioner is entitled in the tax year. A payment of arrears of pension may be a substantial sum covering a number of tax years and the statutory (accruals) basis should thus be applied on request where it is to a taxpayer’s advantage.

Further guidance on this point is available at SE74101 (2002/03 and earlier years) and at EIM74101 (2003/04 and later years).

Arrears of pay are earnings paid after the date when the employee should have received the salary or wages. For tax purposes, arrears of pay retain the character they would have had if they had been paid at the right time. Arrears are “earnings” within the meaning provided by Section 62 ITEPA 2003.

SA Cases

Many individuals who receive these payments will not be SA cases. An SA return should not be issued because of a one-off payment of arrears of pension or pay unless a return is required to be issued for other reasons.

For individuals who are within SA in the year when a payment of arrears is received, overpayments will arise at the time that they complete the return for that year but only if they exclude the income that relates to earlier years.

If you are notified of the payment by the pension provider, or employer, before the return is received, you should set the No Repayment signal on the SA record to prevent a repayment being issued automatically when the return is captured.

If SA only in the year when arrears are received

If the taxpayer asks for the arrears to be spread back, the SA overpayment should be set against any increase in the tax charged for earlier years. For those years you should follow the guidance regarding recalculation of liability for non-SA cases within the Employment Income Manual at EIM42290 and EIM74103.

  • Do not attempt to trigger manual reconciliation in the PAYE Service for the non-SA years unless it is necessary to issue an informal tax calculation because you need to amend a previous informal calculation or because the taxpayer has asked for a more detailed calculation
  • The calculated PAYE underpayment at the end of the last non-SA year should be recorded on the SA record using function CREATE SUNDRY CHARGE. The charge type to be used is ‘Net Underpayment’
  • The relevant due date for payment should be set equal to the relevant due date of the year in which the payment of arrears was made

Note: It is important that you record the PAYE underpayment / amendments on the SA system for the earlier years before you amend the return for the year in which payment of arrears was made. This will ensure that the overpayment for the latest year is set against the underpayment for the earlier years.

In SA in one or more earlier years

If the taxpayer asks that the arrears be spread back

  • For years for which the taxpayer made SA returns

    • Treat as a taxpayer amendment to any returns that are still in date for amendment
    • Make discovery assessments for years that are out of time for amendment

Note: For information regarding tax charge, due dates, Section 86 interest, transfer of overpayments, effective date of payment and so on, see section ‘Assessments Within SA’, subject ‘Pensions etc Taxable On The Amount Accruing In The Year (Accruals Basis)’ (SAM20050).

  • For years for which the taxpayer did not make SA returns 

    • Do not attempt to trigger manual reconciliation in the PAYE Service for the non-SA years unless it is necessary to issue an informal tax calculation because you need to amend a previous informal calculation or because the taxpayer has asked for a more detailed calculation
    • The calculated PAYE underpayment at the end of the last non-SA year should be recorded on the SA record using function CREATE SUNDRY CHARGE. The charge type to be used is ‘Net Underpayment’
    • The relevant due date for payment should be set equal to the relevant due date of the year in which the payment of arrears was made

Note: It is important that you amend or assess earlier years and record the PAYE underpayment / amendments on the SA system for the earlier years before you amend the return for the year in which payment of arrears was made. This will ensure that the overpayment for the latest year is set against the underpayment for the earlier years.