Working and claiming state pension

citylover

Hi everyone

I was just wondering if someone would be able to clear something up for me. My mother is currently 61 and in full time employment. She chose to defer her state pension. However both she and I are getting very confused about her tax codes and how much she should be getting.

My mother earns around £200 per week after tax and for the past year has been on a tax code of 647L. She intends to begin claiming her state pension on the 11th May but continue working until Christmas. First question is, from the 11th what would her weekly take home amount be, weekly wage combined with state pension?

The other main problem is my mother's tax code and I'm unsure if it's correct. At the beginning of April she received a letter telling her that her tax code from the new tax year would be 105L as she would be claiming her state pension, despite her still working for a period of 6 weeks before claiming her pension. My mother told them this and for the past 6 weeks she has been taxed on 747L.

However on the 4th May she received a letter telling her that effective 06 April 2011 until April 2012 her tax code would be 150L. Does this mean that in this week's pay she will be deducted all the tax from the previous 6 weeks that she has apparently incorrectly not paid? Or are the dates simply a formality conforming to the standard tax year and this letter a precursor to the fact that from the week after the letter was dated (to coincide with the claiming of the state pension) the tax code will be different?

Finally, my mother wishes to claim the lump sum for deferring the pension for a year. Based on the information provided, would anyone be able to hazard a guess as to how much this would be?

Sorry for the lengthy post but I really want to put my mother's mind at ease about this!

ceeforcat

Firstly nobody could know what her state pension would be as it is based on her contribution record.

You also use two code numbers - 150L and 105L. Let's say 150L is correct. This would suggest to me that her state pension for a full year would be approximately 5975. Her code is calculated (7475 less 5975 = 1500 converting to 150L).

If no pension received to date in this tax year code 747L has been correct to date. Based on my assumptions code 150L is also correct but it MUST be operated on a Week 1 (or month 1) basis in order to prevent what you fear i.e. tax collected in one lump sum for last six weeks.

In any case the additional tax payable by your mother on her wages will be 20% of her weekly state pension. If she gets £100 per week state pension, her tax on wages will increase by £20. Priority - ensure reduced code is on a week 1 basis.

citylover

Sorry, 150L is indeed the correct figure!

Thanks for the help. Just a couple of things to clarify. Firstly, you refer to making sure the 150L code is operated ona week 1 basis. What does this mean exactly and how would I check this?

Secondly, I believe my mother's state pension will be approximately £90 per week. From what your saying does this mean that she would get the full £90 plus her normal weekly wage, a wage which would be minus normal tax at 150L and minus the extra tax at 20%?

ceeforcat

I may have confused you.

If it is £90 per week - her code should be 279L. This is calculated : 7475 personal allowance less 4680 state pension for full year = 2795. If this is operated on a week 1 basis, each week will be taxed independently without reference to previous weeks. There should be a W1 or M1 after the code. Ring and tell HMRC twhat her annual state pension entitlement is.

She will receive her £90 state pension and her wages - her wages will have an additional £18 deducted in tax. Also ensure that she no longer pays NIC.

citylover

Thank you, you've been a great help!

jimmo

You also asked about her lump sum.
As she is going to be liable to tax at 20% on her combined earnings and normal State Pension she will also be liable to tax at 20% on the lump sum.
http://www.hmrc.gov.uk/manuals/eimanual/EIM74651.htm
Normally tax cannot be deducted from State Pension, hence all the rigmarole with changed code numbers for her employment income.
So, I am afraid your mum can expect a tax bill from HMRC some time after 6 April 2012 for 20% of the lump sum (plus or minus anything that goes wrong this year).
It might be a good idea for your mum to set aside about 25% of her lump sum, in an ISA for preference, in anticipation of receiving a tax bill.
Then, about this time next year and depending on her attitude, she can start chasing HMRC to sort it all out, or, she can do nothing and let HMRC do the chasing.
Either way around she will really need to have the readies available.

suso

regarding the lump sum payment the DWP will have asked for the applicable tax rate for this year, eg nil, basic, higher, additional. (0%, 20%, 40% 50%)

if no rate has been declared the basic rate of tax should be deducted. see
http://www.hmrc.gov.uk/manuals/eimanual/EIM74660.htm

"Tax based on this self-declaration will then be withheld by DWP when making payment of the lump sum. This self-declaration will mean for most recipients of a state pension lump sum the correct rate of tax has been applied at the time of payment. If the individual fails to make a self- declaration of their highest rate of tax, tax at the basic rate will automatically be withheld by DWP. "

not sure when the rules changed but the lump sum should be the only time a state pension can have tax deducted at source.