5. Mr M complains that HMRC provided him with misleading information about the amount of tax he would pay on his deferred state pension lump sum.
6. Mr M told us that he paid an additional £11,891.71 in tax that he could have avoided.
7. Mr M would like HMRC to pay him redress of £11,891.71 for the impact of their misleading information.
8. If you defer claiming your State Pension for a minimum of 12 months you can get a one-off lump sum payment. At age 65, Mr M held off on taking his pension in order to receive a lump sum at a time of his choosing and he wanted to pay the least amount of tax on the money.
9. In the tax year 2021/22, Mr M claimed his state pension lump sum, a figure of £57,034.48, and informed the Department for Work and Pensions (DWP) that his expected highest rate of income tax for that year would be 20%. DWP automatically deducted that amount from the lump sum. This was£11,406.80.
10. In August 2022, HMRC wrote to Mr M to tell him that he should have paid tax at the 40% rate and as such he owed an additional £11,891.71 in tax.
11. Mr M complained to HMRC in August 2022. He explained that all the information he had seen led him to believe that he should have only paid tax at the 20% rate. HMRC explained that his income had gone into the higher rate tax bracket of 40% so he had to pay tax at that rate on his lump sum.
12. After completing the HMRC complaint process in May 2024, Mr M was directed to the Adjudicator’s Office (AO); the final step in the complaint process. He wrote to the AO in June 2024 explaining what information he had been given that led him to believe he should only have paid tax at 20%.
13. The AO completed its investigation and wrote to Mr M in August 2024. It told him that after considering the evidence it would not uphold his complaint.
14. Mr M then brought his complaint to our Office in November 2024.
HMRC provided misleading information
18. When we spoke to Mr M, he explained that he had been waiting until the most financially advantageous time to claim his deferred state pension lump sum. He said that when he received his tax code notice in November 2021 it said on there that income from his pension is taxed at the 20% basic rate. The entry says:Note 7Tax Code BR
Shows that all your income from your job or pension is taxed at the 20% basic rate
19. That, he told us, was the reason why he believed this was the right time to take the deferred lump sum.
20. Mr M also referred to a webpage, ‘Delay (defer) your State Pension’ which he had been directed to by HMRC where it says:Lump sum payment
You can get a one-off lump sum payment if you defer claiming your State Pension for at least 12 months in a row. This will include interest of 2% above the Bank of England base rate.
You’ll be taxed at your current rate on your lump sum payment. For example, if you’re a basic rate taxpayer your lump sum will be taxed at 20%.
21. He said this clearly was misleading as his tax code notice indicated he was a basic rate taxpayer when he claimed his lump sum. The tax code notice is based on an estimate of income for the year, but this income not verified until HMRC received Mr M’s self-assessment return in August 2022.
22. We looked at both the information available to Mr M as well as the guidance which HMRC should adhere to when considering taxation of pension lump sums.
23. We appreciate that the information Mr M has already referred to might have led him to believe he would only pay 20% tax on his pension lump sum. Unfortunately, Mr M may not have been fully informed when he made the decision to draw down his lump sum in November 2021.
24. The HMRC EIM says:
How the State Pension is taxed
Sections 7 to 10 Finance (No 2) Act 2005 Chapter 2A Income Tax (PAYE) Regulations (SI 2003/2682)
A charge to Income Tax arises when a person becomes entitled to a State Pension lump sum, but the State Pension lump sum is not taken into account when determining the person’s total income for Income Tax purposes.
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.’
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.
25. We can see from the evidence that Mr M’s income for the year (excluding the lump sum) was £51,055.22. This means that a portion of his income was taxed at the higher rate of 40% (the higher rate threshold in 2021/22 was between £37,701 & £150,000). This means that his pension lump sum was taxed at that higher rate. As HMRC’s decision to apply the higher rate of tax to Mr M’s pension lump sum was in line with its legislation, there are no indications of maladministration.
26. Mr M told us he is of the view that any writing or guidance HMRC provide should be ‘plain, to the point, accurate and unambiguous’ and his contention has always been that in his matter, HMRC were none of these.
27. The HMRC Charter says:
Getting things right
We’ll give you accurate, consistent and clear information.
28. While Mr M has said that the information he saw led him to a different view and that a layperson cannot be expected to completely understand it, we can see that HMRC directs people to seek advice on its ‘Plan your retirement income’ webpage. This says:
Get help
When planning your pension and retirement income you might need help with:
• choosing a personal or stakeholder pension • planning your savings • choosing how you want to get your retirement income • delaying your State Pension payments (deferring)
Where to get help
You can get free guidance on your retirement savings options from MoneyHelper.
Pension Wise has information to help you decide what to do with your money if it’s in a ‘defined contribution’ pension. If you’re over 50, you can book an appointment to speak to someone.
Paying for financial advice
You can find a financial adviser:
• on the Unbiased website from the Personal Finance Society
29. We appreciate that personal tax affairs can be a complicated matter and that in the examples used by HMRC in the webpage and the EIM, the reference is to basic rate taxpayers and lump sums being taxed at that rate. Mr M raised valid points that there are references in the coding notice to pension tax at 20% (Note 7) and that he had a transfer of allowance from his wife which is only available to lower rate taxpayers. However, as we have already said, the coding notice is an estimate and not a final assessment of a persons income. Also, the Note 7 did not refer to lump sum pension payments but rather related to income from an employer and private pension. The coding notice did make reference to those two entities.
30. We sympathise with Mr M whose decision to claim his state pension lump sum in November 2021 led to him paying a larger tax bill than he had expected, and we appreciate it must have come as an unwelcome surprise.
31. While we recognise the difficulties Mr M experienced, we have not seen evidence that the information available is misleading, and it has been presented in line with relevant guidance. Therefore, there are no indications of maladministration.
1. We have carefully considered Mr M’s complaint about HMRC. We were sorry to hear of his experience and the disappointment of needing to pay a higher rate of tax on his state pension lump sum. We can appreciate it was an unwelcome and unexpected surprise.
2. We have reviewed all the evidence and cannot see that HMRC mislead Mr M with the information it provided him. It also correctly applied the higher rate tax in line with its guidance.
3. This means we will take no further action.
4. We explain in more detail below how we reached this decision.