Tax Advice please

frugal_matelot

Hi,

I recently left the Armed Forces and receive a pension. I also now work full time. I was wondering if I can automatically pay the right amount of tax.

My pension is £10063 per annum and the tax was 944L.
My salary is £31082 per annum and the tax code is BR.

That is all fine and dandy until I do overtime as the company I work for do not see the pension earnings and don't know when I hit the 40% tax bracket. I expect the answer is that I have to work that out for myself and pay the excess at the end of the year. The HMRC however have just informed me that they are changing my pension tax code to 551L because I owe them tax from 2012-2013.

Also, I have now been auto enrolled into the company pension scheme, so I don't know what implications that has on tax.

At the minute I seem to paying tax off from last year, only to incur charges for this years tax, next year.

Hopefully somebody, can give some general advise at least, if not more specific.

Many thanks in advance.

dzug1

Pension contributions reduce the amount of salary your tax is calculated on

As to paying last year's tax this year, and this year's next, that's normal in your situation - you won't pay interest in it.

You will have an option to pay it as a lump sum - if it's a really large figure (sorry I don't know the limit) that may well be the only option.

It will be worse (in the sense of more complicated) when you come to get your state pension

Nicola_Ed

Hi

Tax codes are set to try and collect the correct amount of tax from earnings/pensions each month, but as you are aware this can less than straightforward. Whether tax codes are right or wrong will not alter theamount of tax due, just when the tax is paid (if they are right the tax is paid each month, if wrong there is effectively a catch up charge in the following year as you have experienced) That said, some people prefer not to be running up unknown debts that come as a shock in a later year. If this is the case for you, you could ask for your pension all to be taxed at 40% (code DO) and have your code 944L or now 551L allocated to your salary. You are likely to overpay in the year but this amount can be refunded quite quickly after the tax year end. Given that your earnings will fluctuate due to overtime it is unlikely that your tax will be correct each month.

frugal_matelot

Nicola_Ed wrote: »

Hi

Tax codes are set to try and collect the correct amount of tax from earnings/pensions each month, but as you are aware this can less than straightforward. Whether tax codes are right or wrong will not alter theamount of tax due, just when the tax is paid (if they are right the tax is paid each month, if wrong there is effectively a catch up charge in the following year as you have experienced) That said, some people prefer not to be running up unknown debts that come as a shock in a later year. If this is the case for you, you could ask for your pension all to be taxed at 40% (code DO) and have your code 944L or now 551L allocated to your salary. You are likely to overpay in the year but this amount can be refunded quite quickly after the tax year end. Given that your earnings will fluctuate due to overtime it is unlikely that your tax will be correct each month.

Thanks for this. I did think about doing it that way last year but the HMRC told me that my pension would always be classed as my first income as I would always receive it, regardless of whether I was employed or not. They didn't give me an option or choice on what income had what tax code. I didn't know I could do it that way. I will phone them and discuss it.

Many Thanks

Nicola_Ed

Hi

Below is the relevant section from the HMRC guidance.

http://www.hmrc.gov.uk/incometax/check-multiple-codes.htm

Sharing your Personal Allowance if you pay tax on your main job

You can choose to share your Personal Allowance across more than one job or pension even if your allowances would normally be used up through the main source of income. However if you do this the amount of tax you pay won't change - but it may be simpler for you to pay the tax that you owe against only one wage.
Example: your Personal Allowance is £9,440 (tax year 2013-14) and you have PAYE income from two jobs - income of £16,000 from your main job and income of £500 from your second job. You can tell HMRC to use £500 of your Personal Allowance against your income from your second job so that you receive it free of tax and use the remaining £8,940 against your income from your main job.

System

It doesn't really matter which you make as your main source as ultimately it's the breaching the 40% tax barrier which can/will cause the problem. That only happens when you add both incomes together as opposed to just arising in your employment source.
If there's any way you could provide a more accurate estimate of what you think you will earn at your job then HMRC could adjust your pension code accordingly to try to claw some of the 40% back before the end of the tax year to limit the amount of any underpayment you might have this year. If you overpay you will get it refunded after they get your P60's at the end of the year.