Confused over tax changes, Please advise me

exarmydreamer

My husband and I are ex forces. I'm not sure how my husbands job and pension are going to be affected by tax at the end of this year.

On discharge from the Army, he receives a pension of £8956.80, (before tax) and also has a job which pays, £30432.00 (before tax basic wage). The problem is he does quite a bit of overtime, depending on the weather but up until now he has stayed below the 40% tax threshold.

My concern is with the current changes about to come into effect. My main question is:

a. If he goes over the 40% limit due to overtime or call out, will the tax be deducted from his total earnings i.e they will connect the two incomes together and deduct his pay.

or

b. Do we need to ask for a tax form to declare, being over paid or do they send them automatically ?.

It might sound stupid but, we have never reached this threshold before but may this year due to the change in threshold and work. I have no clue about tax and can't find anything on the internet. Sorry if I have posted in the wrong place and thank you in advance for any advice.:)

twig1_2

all combined income is taxable. The pension provider usually deducts the tax payable assuming you have basic tax allowances.
2012/2013 are in the following link.
http://www.hmrc.gov.uk/incometax/personal-allow.htm
The problem you may face is that if your husband is not self employed then his employer may also be using the tax free allowance to work out the tax deductable on his salary. The employer will have been issued with a tax coding to use by the inland revenue which could have this error on it as unfortunately.
Your best bet is to check with the inland revenue that they know your husband is getting a pension as well so they can issue a correct notice of coding. Once the coding is correct the higher rate tax will be correctly computed by the paye system. Your husbands tax office is usually detailled on the payslip.

exarmydreamer wrote: »

My husband and I are ex forces. I'm not sure how my husbands job and pension are going to be affected by tax at the end of this year.

On discharge from the Army, he receives a pension of £8956.80, (before tax) and also has a job which pays, £30432.00 (before tax basic wage). The problem is he does quite a bit of overtime, depending on the weather but up until now he has stayed below the 40% tax threshold.

My concern is with the current changes about to come into effect. My main question is:

a. If he goes over the 40% limit due to overtime or call out, will the tax be deducted from his total earnings i.e they will connect the two incomes together and deduct his pay.

or

b. Do we need to ask for a tax form to declare, being over paid or do they send them automatically ?.

It might sound stupid but, we have never reached this threshold before but may this year due to the change in threshold and work. I have no clue about tax and can't find anything on the internet. Sorry if I have posted in the wrong place and thank you in advance for any advice.:)

exarmydreamer

Thank you, I've just looked at his P60 and Pension paperwork. He pays just under £1800 in tax (BR) on his Army pension a year and has his tax (standard personal) allowance deducted from his current employer. Xafinity Paymaster who pay forces pensions and his PAYE notice, seem to all correspond.

So, I guess if he goes over, we need take no action. They will just alter his wages as appropriate. Thank you for your help, twig1.

Pennywise

You're right to be concerned with this complication. It's one of the main reasons for all those underpayment notices sent out by HMRC over the past couple of years. It's impressive that you've thought about it and researched it yourself before the problem arises rather than hiding your head in the sand.

Basically, the PAYE system can't cope with two sources of PAYE income (pensions and jobs) where neither itself is over the higher rate threshold, but the two together breach it.

The best HMRC can do is adjust the employment tax code to "anticipate" some higher rate liability, but to do this, they need an estimate of the earnings for each. The best you can do is phone to tell HMRC of the likely amounts of earnings from each source and then they should issue PAYE coding notices that will approximately collect the right amount of tax. During the year, if the overtime changes up or down, you'd need to phone HMRC again to tell them so the PAYE codes can be adjusted accordingly.

Alternatively, let the codes stand as they are but be aware yourself of the higher rate tax accruing but not being paid, and submit a self assessment tax return at the year end. Also remember there'll be higher rate tax on other income such as dividends and interest which again need declaring either on the SA tax return or by phoning HMRC with the details so they can adjust the tax code.

Edited to add - RTI (real time reporting) comes in next April, so in theory HMRC will know the income from each source when it is paid, so they should have the opportunity to change the PAYE code themselves during the year. However, it's a new system so I think it unrealistic to expect them to be on top of things in the early stages of it's introduction.

System

It is normal for xafinity (people who manage the Armed Forces pensions) to assume that he will have another job. They therefore tax the pension at BR and leave the allowance for use on the main job.

I think that you might have to use self assessment

exarmydreamer

Thank you, Pennywise.

I've worked out that he would have to earn £4289.47 in overtime/call out to cross the 2012, 40% threshold. That is after taking into account his company pension contributions for the year.

I used to be a pay sergeant (probably shouldn't admit to that), but had no dealings with the tax side (tax office did this), and it only occurred to me a 5 am this morning, he has earned quite a bit already this year and could be called out a lot more this winter. There is another engineer going on to call outs and this should lessen his work load.

I will have to keep an eye on it, he does have share in the company but there are no dividends paid out on it. Might actually tell him to give his call outs away to other engineers (they might want the extra money), I hate unforeseen bills or owing money. Thank you.

ceeforcat

Generally occupational pensions are increased by inflation.

I would not wish to have the bother of Self Assessment and would advise the following approach from April 2013 onwards.

From that date the personal allowance will be 9205. HMRC could allocate an amount sufficient to cover the pension and apply the balance against his earnings. For example, on a pension of £9000 per annum, a code of 900L could be issued against the pension with no tax paid. A code of 20T (205 being the balance of allowances) could be set against the other income with the result that, no matter what overtime was earned, the correct tax would be paid. HMRC should understand this.

System

ceeforcat wrote: »

Generally occupational pensions are increased by inflation..

However with an Armed Forces pension assuming that he is under 55 and on AFPS75 then the pension will remain at its current level until age 55

kidmugsy

exarmydreamer wrote: »

I've worked out that he would have to earn £4289.47 in overtime/call out to cross the 2012, 40% threshold. ...

Might actually tell him to give his call outs away to other engineers ...

If you keep track of his overtime pay carefully, all he need do is make a personal pension contribution late in the tax year that drops him out of the higher rate tax band.

molerat

ceeforcat wrote: »

[STRIKE]Generally occupational pensions are increased by inflation.
[/STRIKE]
I would not wish to have the bother of Self Assessment and would advise the following approach from April 2013 onwards.

From that date the personal allowance will be 9205. HMRC could allocate an amount sufficient to cover the pension and apply the balance against his earnings. For example, on a pension of £9000 per annum, a code of 900L could be issued against the pension with no tax paid. A code of 20T (205 being the balance of allowances) could be set against the other income with the result that, no matter what overtime was earned, the correct tax would be paid. HMRC should understand this.

Agree with this (if under age 55), 895 against the pension and 25 against the wage will see everything square.

exarmydreamer

Thank you all for your advice, he is 45 at the mo. So am aware of the increase in pension from 55 yrs, due to commuting his pension across at 42 yrs. (take my AGC hat off, again):)

I will keep an eye on his overtime, i'm not sure if he is paying the top amount of contributions to his pension but have decided to look into an increase if not anyway. Checked his HMRC paperwork and they are aware of his pension and work income and have sent him a code for his pension and informed his work of the tax code they should be using.

His work company shares don't provide a dividend but he will receive x amount of free shares after 5 yrs in fund, so no impact on a tax return (until cashed in).

Thanks again for your help.