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Pension P45 Through Payroll

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I'm preparing a client's personal tax return YE 5/4/22 that has:

- P45 from pension lump sum payout (in Oct-21)

- P60 employment income (employment started in Oct-21)

 

It looks like she has given the pension P45 to the new employer in Oct-21, as the P60 "in previous employment" boxes match the pension P45. What's happend is the pension has had too much tax deducted, and the employment has corrected this by refunding the tax. So overall the tax showing on the P60 is exactly correct, but it just shows a lot in "previous employment" and a refund in "this employment". Is that correct the pension P45 went on as new starter information in the payroll?

 

Anyway it's now impossbile for me to submit the return as it doesn't pass the validation checks. I get an error effectively saying there can't have been an employment PAYE refund amount, when there is only one employment! 

 

I can get round this by entering the pension in the employment income section rather than the pension section. The tax will be exactly the same, the validation checks then see two employments and the problem goes away, but it's not right!

 

Replies (9)

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By Hugo Fair
16th May 2022 17:47

I'm as confused as you ... albeit possibly for different reasons:

1. A P45 is headed "Details of employee leaving work", which is when it is issued (i.e. by an employer after making final PAYE payment to an employee ceasing employment) ... so what are the circumstances under which one has been issued by a Pension Scheme?

2. You say the P45 is for a "pension lump sum payout" ... but what sort of 'lump sum'? Many such sums are not even taxable, and few would usually be treated as earnings subject to NICs ... or do you actually mean it was 'a return of previously paid pension contributions' (in which case life gets a lot more complicated depending on the initial tax treatment of the contributions and their timing)?

3. If the P45 did indeed refer to a previous employment, then presumably this pension 'payment' (whatever it was) was not the sole earnings in that tax year that should have been reported on the P45 ... so are those earnings missing from the P45 and may that have something to do with the apparent overpayment of tax?

So far I've concentrated on the lack of clarity as to what happened during your client's previous employment - and, in your shoes, I'd be asking for the individual payslips for that tax year (and sight of the receipts entering her bank accounts) in order to work out what (if any) errors occurred before she started her new employment.

But then you lose me all over again ...
4. It sounds like her new employee has correctly processed her pay (including the possibly wrong P45 values) ... so, unless they have committed some wholly different wrong action (such as ignoring a tax code notice from HMRC or whatever), then they've presumably correctly processed her pay since she commenced employment?

5. "it's now impossbile for me to submit the return as it doesn't pass the validation checks. I get an error effectively saying there can't have been an employment PAYE refund amount, when there is only one employment!"
I've never seen such an Error message ... but doesn't it tell you something?

According to every element of this thread, you say she has had (at least) two employments in the tax year for which you are preparing a SATR ... so it doesn't seem unreasonable for the software to complain if you've entered everything as a single employment!

Feel free to let me know what I've misunderstood (and to answer some of the above questions)!

Thanks (2)
Replying to Hugo Fair:
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By Jane Wanless
16th May 2022 18:42

It could be that the client has taken more than the "tax free" 25% of their direct contribution pension pot, so part is taxable. If they have a P45 for it, presumably there's nothing left in the pot, so the P45 is on cessation of the source.
As for the OP's query, on this basis, the income would be pension rather than employment so the draft tax return seems correct. In view of the error message, can this be queried with the software provider, or should a paper return be submitted?

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Replying to janewanless:
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By Hugo Fair
16th May 2022 20:47

I don't disagree with any of your hypothetical points - subject of course to all the 'could be' / 'would be' / 'presumably' qualifiers.

Which is why I was trying to guide OP towards asking (and hopefully answering) some pertinent questions.
In particular ... if client commenced new employment in Oct-21, then did he/she definitely not have any other employment earnings earlier in that tax year? Or to put it another way is a second employment page needed in the SATR.

None of this is to disagree with the helpful comments from Not Anonymous and yourself - just trying to ensure that the right questions are addressed before charging down just the one specific alleyway.

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By Not Anonymous
16th May 2022 20:13

Pension freedoms/flexibility mean there is nothing unusual now about individual pension funds/pots being emptied.

At which point the pension payer will issue a P45 as that "pension" has ceased.

Oh for the days of everyone having to buy an annuity!

A quirk/fault of the Self Assessment validation is that the pension income goes in the pension section and the employment goes on an employment page so in this situation there is, in the eyes of HMRC's validation, a mismatch as there is negative tax on an employment but no positive tax value of at least the same amount on a different employment page.

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Replying to Not Anonymous:
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By Hugo Fair
16th May 2022 20:59

I was under the impression that in that scenario (member empties whole pot), the scheme is meant to issue a P60 at year-end not a P45 at the point of payment ... but I could well be wrong.

The real issue I suspect is that if you don't have a P45 with an up-to-date tax code when you withdraw money from your pension, the payment will be taxed on an emergency code ... relying on HMRC to then refund any overpayment (supposedly within 30 days) along with a correct tax code notification.

So it sounds like something went wrong last Oct/Nov ... whether HMRC failed to do their bit or OP's client failed to do anything with missives received?
Personally, I'd revert to my earlier post and re-visit all the individual bits of evidence of earnings and tax payments for the year (not just the P45 and P60 mentioned) in case anything else pops out of the woodwork. Only after that, if still necessary, would I grudgingly head for the paper forms.

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Replying to Hugo Fair:
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By Not Anonymous
17th May 2022 07:05

If you look at the "One-off or lump sum payment — whole fund withdrawn or final payment made" section in CWG2 it does refer to issuing a P45.

If the pension company were to issue a P60 would you expect that to be just for the tax year in which the final payment was made or each year thereafter until the (ex) pensioner dies??

Issue of a P45 seems much neater and everyone, pension co, taxpayer and HMRC know that source of income is finished with.

Thanks (1)
Replying to Not Anonymous:
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By Hugo Fair
17th May 2022 12:58

FWIW , no I wouldn't have expected a P60 (to be issued) each year thereafter until the (ex) pensioner dies. Why would you think that? - it's no more logical than an ex-employer having to do the same!

But I get the rest of it ... which just seems a little weird to me (having, in my defence, never run a pensioner payroll) as that is not what a P45 was originally designed for - but CWG2 rules!

BTW ... HMRC will "know that source of income is finished" due to receipt of an FPS with that information (not due to a P45 that they no longer receive).
And both the Pension company and the taxpayer will need more than a P45 to be clear as to the status - especially if the ex-member has multiple funds with the same scheme (only one of which was the source of the paid-up payment).

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RLI
By lionofludesch
17th May 2022 09:03

Anyway, setting aside all this high brow discussion, I'd stick the pension in employments and put a note in the white space if the software can't cope with reality.

Bit disappointing, though.

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Intercity
By Mr Hankey
17th May 2022 11:13

The pension payment was taking her whole pension pot, 25% was tax free and and the remaining 75% had PAYE deducted. The P45 issued by the pension company related to the 75% element. I think this part is absolutely correct - 75% has had PAYE deducted and a P45 (rather than a P60) was issued as she has left the pension for good.

The employment that commenced during the tax year was the first and only employment of that tax year, so there only being one employment for the tax year is also absolutely correct.

The tax overall is bang on (ie it's £0.00) but it won't pass the validation checks as it can't cope with an employment PAYE refund when there is only one employment entered. My understanding is the validation rules are set by HMRC and applied by the software company, so I think I'd get the same problem no matter which software I was using/ how much I queried it with them.

I think I'll enter the pension as employment income and make a note in the white space. I really would rather not file on paper, my fear is that it will fall into the abyss!

Thank you for your comments, it is appreciated.

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