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Sam
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Category: UK Tax
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Experience:  26 HMRC expertise, PAYE, Self Assessment ,Residency, Capital Gains, CIS ask for Sam Tax
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I have just retired, my tax code has been altered from 950L

Resolved Question:

I have just retired, my tax code has been altered from 950L to K190. Wk 1
This I am told is because I have carried on working.
I also receive 3 pensions, 2of which they have taxed at 40% the other is left at normal rate. I cannot understand why I have no personnel allowance any more and I'm paying tax at such a high rate.
Submitted: 10 months ago.
Category: UK Tax
Expert:  Sam replied 10 months ago.

Hi

 

Thanks for your question

 

Can you advise

1) that you are over age 65

2) How much each of the pensions are a year

3) The personal allowance awarded on your tax code

4) The deductions from your tax code

 

Thanks


Sam

Customer: replied 10 months ago.

Yes I am just 65


total amount of my pensions at 40%tax are about £578.50


the other pension at normal rate is about£6150.00


tax code now K190. Wk1


i don't get pay slips with my pensions so I know it's tax as stated above


state pension from now until end of tax year £ 4600.00


my work tax at present is on the code K190. Wk1

Expert:  Sam replied 10 months ago.

Hi

 

Thanks for your response

 

First you should know, that state pension, whilst a taxable income, cannot actually have tax deducted from it, so instead its always included in your tax code, to cover it by personal allowances AND often the year that the state pension starts, sees an amount that represents the whole year included rather than just the ACTUAL amount that will be received from your 65th birthday to the next 5th April.

 

Also age related allowances have been phased out and as you were born after 6 April 1948, you are only entitled to £9440 (basic personal allowances)

 

So, we have basic personal allowances of £9440 less state pension

You do not advise the amount actually deducted from your allowances, perhaps you could advise this please.

 

Also your annual income in employment, as I need to establish is you are truly breaching the 40% tax rate band.

 

Thanks

 

Sam

Customer: replied 10 months ago.

Amount deducted from personnel allowances


-£2985. Adjustment to tax rate bands


-£8433. State benefit /pension


-£11418. Total. From personal allowance. £9440.


Flat rate job expense +£. 60


Giving a minus figure of-£1918.


my annual figure of employment will be around £34000.


 


 


 


 

Expert:  Sam replied 10 months ago.

Hi

 

Thanks for the more detailed answer.

 

Ok, so as your total income will be £34,000 salary plus £4600 state pension, plus main pension £6150 and the two smaller pensions total £548 - we have a total actual income of £45,298 which is in excess of £42475 which just tips you into the 40% tax bracket (by £2823)

 

You are awarded £9440 allowances plus the flat rate expenses of £60 - which equates to an initial award £9500 (Code 950L)

From this they have deducted an equivalent of a whole years of state pension - this is due to the fact they want to be sure the right tax is deducted between now and 05/04/2013, and absurd as it seems, by including a whole years worth of state pension (when you only have just under half a years actual state pension to be paid) it ensures that the right tax is deducted for the remainder of the tax year.

So a deduction for state pension will continue forever, as its the only way they can then allow the payment to be paid each week in full (without any direct deduction of tax) so by covering it by personal allowances, this deals with the fact that tax CANNOT be deducted from it, as the DWP do not run payrolls on state benefits.

 

However you also have the added complicated, that your combined incomes see you sit just into the 40% tax rate band, whilst no one income in its own right breaches £42475.

So each of your income has to be looked at, so some of this 40% tax is collected. And its right that the two smaller pensions are charged 40% (so of the £2823 - £578 will be correctly charged at 40%) but this still leaves £2245 income that needs to suffer 40% tax.

If HMRC were to charge 40% on the £6150 pension, which would ensure that the 40% tax due on just £2245 is collected, then you will actually pay too much tax, as only £2245 of the £6150 needs to suffer at 40%.

So instead they make an adjustment in your tax code, to recoup the balance.

 

I know it seems you are paying excess tax, but HMRC can either choose to really make you suffer by charging the larger pension of £6150 at 40% - which would be too much tax, or make this adjustment in your tax code, to recoup that additional 40% tax due. And they have chosen the option that sees you with as much money as possible in your pocket and not theirs (although you then can claim a refund if they deduct more than is needed)

 

But if you would prefer to pay too much ( and see it as savings) then you can ask

1) That code D0 be operated on the £6150 - which will see this monthly payment decrease by 20% more (as 40% tax will be paid) and lose the adjustment for the rate bands in your tax code (so your code increase to 106T) OR

2) Keep the adjustment in your tax code and pay the additional amount through your salary.

 

But in the main I can advise these adjustments to your tax code are accurate.

 

I hope this helps you understand the need by HMRC, but feel free to ask any follow up questions.

 

Thanks


Sam

 

 

 

 

 

 

Sam, Accountant
Category: UK Tax
Satisfied Customers: 12791
Experience: 26 HMRC expertise, PAYE, Self Assessment ,Residency, Capital Gains, CIS ask for Sam Tax
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