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Wednesday, 3 October 2012

Tax on retirement annuities

Since April 2007 the way you pay tax on a retirement annuity has changed. If you think you have overpaid tax there are deadlines for claiming back overpayments.

What is a retirement annuity?

Retirement annuities are paid out of Retirement Annuity Contracts, which were a type of pension plan that individuals could take out before 1 July 1988. After this date they were replaced with personal pensions, but those started before 1 July 1988 can carry on until the person retires.

How your retirement annuity was taxed before April 2007

Before 5 April 2007 all retirement annuities were paid with tax taken off at the basic Income Tax rate. If your income was low enough not to pay tax you completed a form R89 'Application to receive an annuity without tax taken off'.

How your retirement annuity is taxed now

On 6 April 2007 the system changed. Now all retirement annuities - except Purchased Life Annuities - are taxed through PAYE (Pay As You Earn), the same as personal or company pensions.

How PAYE works if you receive a retirement annuity

HM Revenue & Customs (HMRC) sends your annuity provider a tax code that tells them how much tax to deduct before they pay you. The tax code notice might also ask for a deduction of tax due on your State Pension if you're not already paying tax on this through other means. The tax code is based on information HMRC have about your age and overall income.

You'll receive a form P2 PAYE Coding Notice telling you what your tax code is. It's important to check it. If you think any of the information is wrong you can ask HMRC to re-check it and get a refund if you've overpaid tax. Read the related guides under 'More useful links' below to find out more.

Form P60

At the end of the tax year you'll get a P60 End of Year Certificate. This shows the amount of your annuity and the tax that's been taken off. A tax year runs from 6 April one year to 5 April the next year. Keep the P60 in a safe place in case you need to fill in a tax return or check how much tax you've paid.

If you think you've overpaid tax on a Retirement Annuity Contract

If you're concerned that you've paid or are paying the wrong amount of tax on a Retirement Annuity Contract, you can call the HMRC Retirement Annuity Contracts Helpline for advice on 0845 366 7868, open from 8.00 am to 8.00 pm, Monday to Friday and from 8.00 am to 4.00 pm on Saturday.

If you are calling from outside the UK you can contact the helpline on Tel + 44 151 471 8436.

When you call the helpline please have the following information to hand:

  • your National Insurance number or tax reference
  • details of your annuity 
  • details of any other income you get, such as a State Pension or investment income

If you'd rather write, the address is:

HM Revenue & Customs (HMRC) RACS
Leicester and Northants LPO
Saxon House
1 Causeway Lane
Leicester
LE1 4AE

Deadline for claiming a tax refund

If you've been paying too much tax you can claim a tax repayment for up to six tax years. However, you must claim by 31 January towards the end of the sixth tax year.

For example, if you make a claim before 31 January 2012, you will be entitled to be repaid back to April 2006. If you make a claim on 1 February 2012, you'll miss out on any repayment due to you up to April 2006 and your claim will only go back to April 2007.

How your tax rebate will be paid

For claims for tax overpaid after April 2007 you'll get your repayment through PAYE.

For claims for tax paid before April 2007 you'll be sent a refund. Note that you may need to send your annual statements to HMRC so that they can calculate the amount that's due to you.

Purchased life annuities and tax

Purchased life annuities pay a guaranteed income for life and can be bought with money from any source, not just pension income.

If you're getting a purchased life annuity it's probably being paid to you after basic rate tax has been taken off. If you don't think you should be paying tax on it - or if you think you should be paying less tax - because you're on a low income you can claim a refund. Follow the links to find out more.

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