How is tax paid when retired?

Dickens

Callistemon21

The letter which informs you of your tax code is set out thus:

Personal Allowance: £....
Less State Pension: £....
Total Tax-free Amount = £....

Your total tax-free amount is used as follows:
Other Pensions: £....
Other Income: £....

I'm confused (feel pity not scorn, I'm a complete dunce in some areas).

Doesn't everyone have the same standard Personal Allowance of £12,570 income on which you do not have to pay tax?

Is the State Pension then deducted from that amount?

Yes, everybody has the same personal allowance and no, the state pension is not deducted.

Sorry, that's misleading. The state pension doesn't reduce your taxation. Yes, the state pension is deducted from the personal allowance, so if you have a personal pension and/or any other source of income, you could end up paying 20% tax on almost the whole amount.

HMRC totals the whole amount and taxes anything in excess of the personal allowance.

I have four separate tax codes, as I assume everybody with more than one pension has. This allows the pension providers deduct tax at source, but it's only an estimate.

When the increase in state pension was announced, I did point out that people with another source of income could effectively lose 20% of the state pension increase - even if it's not taken directly from the SP. It all ends up the same in the end.

growstuff

Callistemon21

But that's not how they work it out.

They don't total it then work it out that way; the State Pension is always taken off the Personal Allowance and then the amount of Income Tax payable is worked out.

That's not how the calculation was presented to me.

I copied that from the letter I got last year, so that's how mine was presented.

I have never received any letters.

I do all mine online. I filled out the form and then the calculation was done for me. They added all my income together, deducted the personal allowance and the amount I'd already paid through my tax codes and told me to pay the rest.

Dickens

Callistemon21

The letter which informs you of your tax code is set out thus:

Personal Allowance: £....
Less State Pension: £....
Total Tax-free Amount = £....

Your total tax-free amount is used as follows:
Other Pensions: £....
Other Income: £....

I'm confused (feel pity not scorn, I'm a complete dunce in some areas).

Doesn't everyone have the same standard Personal Allowance of £12,570 income on which you do not have to pay tax?

Is the State Pension then deducted from that amount?

Yes, everyone has that Personal Allowance.

I don't know if anyone's State Pension would exceed that amount but I doubt it.
The State Pension is deducted from the Personal Allowance first.

If, of course their State Pension does exceed that amount, £12,570 at present, then any amount above would be taxable.

I don't know why I blanked it out on mine, it's not a secret! 😂

I printed it off and I've got it in front of me.

growstuff

I have never received any letters.

I do all mine online. I filled out the form and then the calculation was done for me. They added all my income together, deducted the personal allowance and the amount I'd already paid through my tax codes and told me to pay the rest.

Yes, DH does his online but his is more complicated than mine.

Nobody's state pension exceeds the personal allowance (unless they have an extraordinary amount of SERPS), but people with any private/occupational pension and/or other income (from rentals, etc) will almost certainly pay tax. Therefore, the increase in state pension will increase the total income and the increase will be taxed.

OldnProud said their relative had received a letter so it probably will be set out like mine, I think, * growstuff*.

It could have changed since last year though.

They can’t take tax from her old age pension so it will come out of her private pension . It won’t be much if she only gets a small private pension. I get my old age pension plus a small pension from my late husband and a works pension of my own . I don’t pay a lot of tax .

Callistemon21

OldnProud said their relative had received a letter so it probably will be set out like mine, I think, * growstuff*.

It could have changed since last year though.

I think you are right, Callistemon.

The person in question tried to read the letter out to me yesterday over the phone. Without actually being able to see it, it was double-dutch to me, but on reflexion, it sounded to be set out very much like your letter.

If her total income is below the personal allowance she still won't pay tax, or very little.
Th Government doesn't plan to put the Personal Allowance up for a while.

If she has a lot of savings it would be a good idea to switch them into ISAs and PB, which are tax-free.

I have done a sample calculation for you based on an occupational pension of £3600 pa (£300 a month) and the maximum state pension from April 2023.

The tax code will be the tax free allowance minus the annual state pension. If her pension is less, then substitute that. Lop off the last digit and substitute the letter L to get the code.

Thank you everyone for your clarification!

I thought that your total income was added up, then the personal allowance deducted from that total, and then you were taxed on any amount that exceeded it.

By my rough calculations, they will definitely have some tax to pay in the coming tax year, Callistemon.

Five years ago they 'inherited' some SERPS or additional state pension (I don't know exactly what and nor do they) from late spouse. It increased their state pension considerably, and the 10.1% icrease in the state pension in April will mean that not enough of the personal tax allowance will be left to fully cover the small private pension too as it has up until now.

That's my current understanding anyway. Things might become clearer when I eventually get to see the letter for myself and check out the exact figures involved.

Thanks everyone for your input. It has been very helpful.

NorthFace

I have done a sample calculation for you based on an occupational pension of £3600 pa (£300 a month) and the maximum state pension from April 2023.

The tax code will be the tax free allowance minus the annual state pension. If her pension is less, then substitute that. Lop off the last digit and substitute the letter L to get the code.

Thank you

Callistemon21

OldnProud said their relative had received a letter so it probably will be set out like mine, I think, * growstuff*.

It could have changed since last year though.

It comes to the same thing, however the calculation is set out.

If your total income exceeds the tax free allowance, it will be taxed, probably through an adjustment to the tax code on private pensions or other income.

M0nica

Yes, deducted from any other source of income they have. The state pension is never taxed.

It isn't taxed at source but it is taxable - depending upon the level if your other income.

Callistemon I can see why there are two ways of calculation.

One is the way you have described to calculate the tax code and is done before the beginning of the tax year.

The one I was given is sent after the end of the tax year and shows what my income has actually been, the amount of tax already paid through my tax code and (in my case) the shortfall.

Dickens

Thank you everyone for your clarification!

I thought that your total income was added up, then the personal allowance deducted from that total, and then you were taxed on any amount that exceeded it.

That is correct - the calculation showing exactly that will appear when completing your tax return (at least it does on my professional software)

growstuff

Callistemon I can see why there are two ways of calculation.

One is the way you have described to calculate the tax code and is done before the beginning of the tax year.

The one I was given is sent after the end of the tax year and shows what my income has actually been, the amount of tax already paid through my tax code and (in my case) the shortfall.

That's not a coding notice. They send out letters if they disagree with the information on your tax return.

On the subject of tax - do you all know about the Marriage allowance? Here's a link to HMRC's notes on the subject.

www.gov.uk/marriage-allowance

Basically, if your income is less than the PA you can transfer up to £1260 of it to your partner (married or in civil partnership) You could save up to £252 in income tax. Worth having

I’ve just received my tax coding for 2023/24 and it appears that I will be paying more tax due to the big increase in the state pension. I also did a rough calculation for 2024/25 and it appears that my state pension will then be taxed if the personal allowance is not increased, the triple lock is maintained, and inflation is still high in September 2023.