Mum paying tax when income is under the allowance. Advice?

Nine_Lives

If it's all correct, then there's no problem, if the following is incorrect then she'll need to know what to do.

My mum is out of work due to disability. She has 2 benefits which is her only income

* Incapacity benefit
* Disability living allowance

She's a non tax payer & only the other day she applied for an AA savings account & applied for interest to be paid gross based on this.

My dad died in Sept & my mum has had to go through the process of receiving her entitlement to his pension.

she received paperwork through saying her first payment will be £415 net, which will have had tax paid on it. This will be from 1st Oct to early December (i think!). After this, her payments will be approx £293.pence gross.

I can't give the exact figures as i don't have the letter at hand but they're close.

Anyway, she had a letter come through she told me, from this company dealing with these pension payments (Capita Heartshead) saying her tax code is 747L and that she'll be paying tax until her code is sorted out.


As neither of us have had to experience this before, is this all correct?
If so, does she get any of this tax returned to her?


Also, is my dads pension which she will be receiving, all part of her income (as in, does the incapacity get added to the disability get added to the pension = grand total) ... and based on this is it decided whether she is below or above the tax threshold? Or is some/all of this not considered as "income"?

TIA.

joedenise

All benefits and pensions are included for tax purposes. I've had the same problem recently. I've been on ESA but have also had accrued holiday pay from work, neither of which were taxed - a couple of weeks ago a received a letter from HMRC saying that I owed more than £500 in tax for 2010/11.

Presumably the same will happen for this tax year 2011/12. I am still on ESA but will be getting my pension in about 4 months time, at which time I have decided that I won't claim the ESA anymore, even though I will still be entitled to it (it's contribution based not income based).

Denise

pjclar02

Hello there

I don't have time to reply in full at the moment but:

1) Disability living allowance is not taxable
2) Incapacity benefit may be taxable - but not always;
3) ESA - normally not taxable

If your mum's payments are only £293 gross per month then there should be no tax with a 747L tax code, but then nor should there be on a payment of £415 so that may be an error.

Your mum should be able to apply to receive her bank interest gross also if her income is below the personal allowance level.

Sorry for being brief - hopefully someone else will provide a full answer.

molerat

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/IncomeTax/IntroductiontoIncomeTax/DG_078305 shows which benefits are / are not taxable, IB (from wk 29) is, DLA is not. If she has a tax code of 747L (is there a W or M1 after it) she should not be paying any tax on that amount of monthly pension. She needs to speak to her tax office to get the IB taken from her tax code so it sorts itself out. She may have to sort a refund out at the end of the tax year.

Only taxable income is counted for receiving tax free interest.

Nine_Lives

Thanks for the replies guys.

I've got the paperwork in front of me now but as my mums out, i can't find anything mentioning her tax code other than what is stated on the pension payslip.

The payslip has her name on. Gross pension £892.68. Deductions of £468.80. Net Pension £423.88.
Taxable Pay: £892.68. Tax Paid £53.80.

Under the heading "Make up pension this month":

Pension: £297.56
Pension Arrears: £595.12

Under the heading "Deductions this month":
TAX CODE 747L MTH1: £53.80
Payment on account: £415.00

That's (^^^^) as far as the payslip goes.

As far as paperworl from Capita Hartshead goes...

* It says my mum is entitled to receive a spouses pension payable from 1st Oct 2011
* The spouse pension amounts to £3,570.69pa payable in monthly instalments of £297.56gross.
* They (the contact on behalf of Capita Hartshead) has arranged for £415.00 paid directly to my mums bank account, this being 70% of the arrears of pension due for the period 1st Oct 2011 - 30th Nov 2011. They have calculated the total arrears of pension due to be £595.12gross, the remainder of which will also be paid with the first instalment.

* Please note your pension will initially be taxed at Basic Rate. This will be amended once notification of your correct tax code is received from HMRC. (Received by who - is my question?)


Which is basically the key points i've picked out from the letter.

molerat

She is allowed to earn £622 per month before tax is payable. The first payment is £892 so £270 is taxable at 20% so £54 tax. As her tax code has the M1 suffix it is not cumulative and the overpaid tax will need to be reclaimed.

Nine_Lives

molerat wrote: »

She is allowed to earn £622 per month before tax is payable. The first payment is £892 so £270 is taxable at 20% so £54 tax. As her tax code has the M1 suffix it is not cumulative and the overpaid tax will need to be reclaimed.

Thanks for that.

Will that be automatic, or will my mum need to call [someone] or get [a] form to send somewhere?

If so, who does she call or what form does she need?

Thinking about it, would it be done at the end of the tax year or now?

xylophone

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/BenefitsTaxCreditsAndOtherSupport/Illorinjured/DG_10018913
http://www.hmrc.gov.uk/incometax/overpaid-thro-pension.htm#3
http://www.hmrc.gov.uk/tdsi/ten-per-cent-guidance.htm
When doing any calculations, don't forget to use tax bands appropriate to the year in question. http://www.hmrc.gov.uk/incometax/basics.htm

patanne

The important bit is "this will be amended once notification.....". If HMRC know her circumstances already then as soon as the pension let them know what they are paying her, then they can issue her with a cumulative code instead of the week 1/month 1 the pension are currently using. They have 3 months before the end of the tax year to sort it. If they do it in that time, which should happen, then the overpaid tax will appear as part of one months pension.