Dads Tax Code Now Mum Has Gone

bj-sailaway

Thank you jem16, I'm sorry about your husband. Doesn't matter what age you are does it.

bj-sailaway

OK, can anyone clarify I've got this right,

Allowance of £7480, less state pension £4381, less private pension of £4500, giving code of 140.

So, the pension income is never tax free? As this is his only income he ends up wtih £1,400 per annum that he doesn't pay tax on, and the rest - about £7500 he pays tax on - as it is taken from his £7480 allowance? If he had more 'other' income, it would be tax free as the code would increase?

I think this stinks, the money he's put in his pension fund, and already paid tax on as he earnt it, is now taxed as he uses it to fund and keep him in his old age. And the government wonder why people don't put into pension funds!

Maybe I've got it wrong?

jem16

bj-sailaway wrote:

OK, can anyone clarify I've got this right,

Allowance of £7480, less state pension £4381, less private pension of £4500, giving code of 140.

You have missed out the letter after the tax code which is very important. I suspect it is K as the allowance minus the two pensions gives MINUS £1401. So basically this means that he has used up all of his £7480 tax free allowance and tax has to be collected on the other £1401 that he is above his personal allowance.

So, the pension income is never tax free? As this is his only income he ends up wtih £1,400 per annum that he doesn't pay tax on, and the rest - about £7500 he pays tax on - as it is taken from his £7480 allowance? If he had more 'other' income, it would be tax free as the code would increase?

You are a bit confused here. Your Dad still has £7480(although I'm sure this is £7420 - can you check?) tax free allowance. However his income which totals £8881 is above his allowance by £1401 and tax has to be collected on that much (not £7550 as you thought). To enable HMRC to collect this tax correctly, they have to adjust the tax code that his works pension uses to allow for his total income. If they left the code at the normal 742, no tax would be collected as his works pension on its own is below his tax free allowance. A tax code of 140K will allow them to collect the correct amount for his TOTAL income.

As the next £2150 above his personal allowance is taxed at 10%, your Dad should be paying the £1401 at 10%, making this £140.10 for the year or £11.66 per month approx.

I think this stinks, the money he's put in his pension fund, and already paid tax on as he earnt it, is now taxed as he uses it to fund and keep him in his old age. And the government wonder why people don't put into pension funds!

It's not taxed as he earned it. Any money paid into a pension gets tax relief at the appropriate amount. The tax comes when he draws his pension and may indeed, as with your Dad, take him over his tax free allowance.

margaretclare

bj-sailaway wrote:

So, the pension income is never tax free?

No, it's not 'tax-free' in the sense I think you're implying. It's income, and therefore taxable, unlike some benefits e.g. Attendance Allowance, which are not taxable.

I think this stinks, the money he's put in his pension fund, and already paid tax on as he earnt it, is now taxed as he uses it to fund and keep him in his old age. And the government wonder why people don't put into pension funds.

You're entitled to your opinion. However, he did get tax relief on the money he put into his pension fund. This gives rise to a lot of discussion - tax relief on the way in but taxed as income on the way out. However, people in the retirement age-groups do get higher personal allowances than under-65s which helps to offset the tax.

DH and I are still tax-payers aged 71. This year is the first year EVER in my life that I haven't paid any tax at all - last year I paid the princely sum of £6 in the whole year. DH pays tax on his Scottish Widows annuity and because of tax allowances going up this tax-year, he pays less tax on it this year than previous years.

FWIW I've still been putting into a pension fund up to recently, have recently transferred it into a SIPP and just put it into drawdown. So I got a 25% tax-free lump sum. I've no regrets about putting money into pension funds even though you think taxing us in retirement 'stinks'!

Margaret Clare

Mikeyorks

bj-sailaway wrote:

Maybe I've got it wrong?

Yes - sorry, but you have it wrong.

As the post above from Jem16 indicates - the 140 you cite is a negative sum designed to increase the tax deducted from the occupational pension. In order the overall tax from the overall income .. is correct.

As earlier posts have indicated - income from pensions is taxable. The state pension is not taxed at source, so the other pension is taxed 'out of proportion' to account for that.

Bit more on 'K' codes here :-

http://www.hmrc.gov.uk/pensioners/tax_codes8.htm

isasmurf

Before we go down this path of K codes, I'm a bit confused as to why the private pension is being deducted from the personal allowance. Shouldn't it be the state pension is paid gross and has used up £4381 of the personal allowance, so this is deducted from the personal allowance. This gives the OP's dad a new PA of £3,039 (and a tax code of 304Y).

If the private pension is deducted from the personal allowance that implies that it is paid gross, shouldn't it opreate through PAYE, and then there would be no need for a 'K' code.

jem16

isasmurf wrote:

Before we go down this path of K codes, I'm a bit confused as to why the private pension is being deducted from the personal allowance. Shouldn't it be the state pension is paid gross and has used up £4381 of the personal allowance, so this is deducted from the personal allowance. This gives the OP's dad a new PA of £3,039 (and a tax code of 304Y).

If the private pension is deducted from the personal allowance that implies that it is paid gross, shouldn't it opreate through PAYE, and then there would be no need for a 'K' code.

To be honest that's what I would have expected to happen too, which is what I first said in post number 3.

Mikeyorks

isasmurf wrote:

If the private pension is deducted from the personal allowance that implies that it is paid gross, shouldn't it opreate through PAYE, and then there would be no need for a 'K' code.

I'd assumed

from his employment as a clerk of works for Surrey County Council,

there was current employment - as well as pensions! In which case the 'K' code would be operating against the employment - and be correct.

But looking back - I think that's well spotted - and the last post (of the originator) does appear to indicate there is no current employment. Just the state / occupational pensions. In which case the 'K' code is inappropriate, and will be giving the wrong result, by a margin. The correct tax - assuming just the 2 pensions - is as Jem16 calculated.

Needs a modicum of clarification from the OP? But if it is just the 2 pensions - he needs to take up with HMRC why they are deducting the occupational pension - if it is that provider who is operating the Code number.

bj-sailaway

I'll have to check on the letter after the code, the paperwork is in dad though, I'll have a look tomorrow.

I'm totally confused, the tax office say the code is right, whatever the codes, letters etc. etc. mean, the net result is he is being deducted £147 tax PER MONTH, way more than others have indicated here. But the tax office say the code is right. Whether the council that pay his pension are deducting the wrong amount, who knows, I certainly don't!

oh, he doesn't work, I just meant the pension was earnt during his days working for the council.

But hey, he got £20 off his council tax!! I guess he should be grateful. Actually, he isn't complaining, he just says he'll cut back, but he doesn't exactly live the high life now.

jem16

bj-sailaway wrote:

I'll have to check on the letter after the code, the paperwork is in dad though, I'll have a look tomorrow.

I'm totally confused, the tax office say the code is right, whatever the codes, letters etc. etc. mean, the net result is he is being deducted £147 tax PER MONTH, way more than others have indicated here. But the tax office say the code is right. Whether the council that pay his pension are deducting the wrong amount, who knows, I certainly don't!

£147 per month :eek: This is way too much if his total income is only £8881 as you have said. To be paying that much he would be getting no tax-free allowances. Are the figures you gave us, the only figures on the tax code notice?

The council can't pay the wrong tax - they can only apply the code given to them by the HMRC. If the code is 140K then this will mean he is paying too much.

oh, he doesn't work, I just meant the pension was earnt during his days working for the council.

But hey, he got £20 off his council tax!! I guess he should be grateful. Actually, he isn't complaining, he just says he'll cut back, but he doesn't exactly live the high life now.

I hope the £20 off is the single person's discount for the council tax which I'm assuming your Dad will have applied for?