Cash clinic: Are tax payments my fault?

I decided to take a lump sum of £17,886 and a reduced weekly pension (currently £465 a month).

The Pension Service told me that it would deduct any tax I had to pay off the lump sum before it was paid. I then received a form to let them know what pension I wanted to receive (ie amount of lump sum and state pension).

However, I appear to have mistakenly ticked the box which said 0 per cent income tax. The form said I should tick “no” if I wanted to claim my lump sum now.

However, it then said that if you answer “no” then we need to know the rate at which you expect to pay income tax for the 2010-11 year.

As I had retired on 30 April, 2011 I wrongly believed I wouldn’t have to pay tax as I had already paid tax on my wages and the pension service had already sent me that 9 June letter saying it would take the tax off before paying the lump sum.

I have agreed to pay them back 35 months at £95.76 a month and a last payment of £96.07 on 5 January 2016. The first payment was taken on 5 January, 2013.

Maybe I have been naive, but I honestly thought I was filling in the form correctly. But now I have to pay tax every month for three more years.

I wonder if you could advise me as to whether this is a fault on the part of the Pension Service and if I can challenge them for the amount I have to repay.

JN Livingston

When you reached the state pension age, you would have had two options. These were to either take your state pension or defer it. You elected to defer the pension.

When the state pension is deferred again you have two options when it comes to starting your pension payments. You can either take the lump sum or you can take a higher ongoing pension.

In both options the state pension is taxable as income and therefore any lump sum taken in lieu of deferred state pension should also be taxed in the normal way. Any lump sum taken would be added to your other income in the tax year in which the lump sum was paid and tax should have been deducted.

Accordingly, if the lump sum plus any other income received in that tax year would take your total income over the level of your personal allowance, tax will inevitably be payable. The personal allowance for the 2011-12 tax year was £7,475.

Without having full details of all of your other income, I cannot comment on whether you can challenge the amount you have to repay. It does appear, however, that the entries you made on the form from the pension service have contributed to the misunderstanding. The offer to pay the tax back over a 36-month period therefore appears a fair one.

• Neil Whyte is tax partner with accountants and business advisers PKF.

If you have a question you need answered, write to Jeff Salway c/o The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or email: jvsalway@gmail.