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HMRC Pension Lump Sum not appearing on the tax computation

Article ID
ias-10569
Article Name
HMRC Pension Lump Sum not appearing on the tax computation
Created Date
28th August 2012
Product
IRIS Personal Tax
Problem
The clients lump sum state pension is not appearing within the income section at the top of the tax computation
Resolution
The lump sum payment will give rise to a charge which is calculated at the highest rate of tax which is applicable to this client, this charge will be shown below the tax due section on the tax computation. The client would have paid tax on the lump sum state pension and therefore will not show within the income section at the top of the tax computation. If the client has therefore paid more tax than is due then the client would be entitled to a tax rebate which would include the tax paid on the lump sum state pension. If your client does not have any net taxable income then they would be entitled to a rebate of the tax that has been paid. If the client has had a lump sum payment from the HMRC and no tax has been deducted and they do not have any net taxable income then they are not liable for any tax on the lump sum payment. If they do have net taxable income then within the Tax Borne area the breakdown of the tax will be shown. Under these entries there will be a line that states Lump Sum Payment of xxxx at 20% = xxxxx. More information can be obtained from this section of the HMRC website: https://www.hmrc.gov.uk/manuals/eimanual/eim74651.htm Section 577(1A) ITEPA 2003 See EIM74650 for an overview of the state pension lump sum option introduced from 6 April 2005. Section 7(1) Finance (No2) Act 2005 confirms that a charge to Income Tax arises when a person becomes entitled to a state pension lump sum. But section 7(2)(b) advises that any state pension lump sum shall not be taken into account when determining the person’s total income. These rules mean that whilst any state pension lump sum is charged to Income Tax it will not be aggregated with the individual’s other income and consequently it cannot push the individual into a higher tax band. Neither can it affect the amount of any age-related personal allowance or married couple’s allowance that might be due. Instead any state pension lump sum is taxed at the highest rate of tax that applies on the individual’s total income. This highest rate is the one that applies after the set-off of all reliefs and allowances that are deducted in ‘arriving at’ and ‘from’ total income. This rate of tax is commonly referred to as the individual’s “marginal rate”. This approach was confirmed during the committee stage of the Finance Bill debate ” Total income is a statutory expression that draws together all sources of income that are taxable and from which certain deductions, including personal allowances, are then available. That net amount of income is then charged to income tax at the appropriate rates. I am happy to confirm that the rate of tax applied to the lump sum, commonly known as the marginal rate, is the one that applies to total income less all statutory deductions and personal allowances that can be deducted. ” (Hansard – Standing Committee B, 21 June 2005 AM, Column 25, Ivan Lewis, Economic Secretary to the Treasury) For example if the individual is liable to income tax in a tax year at the basic rate on their other income, that rate will also apply to any state pension lump sum.

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