My mums tax - how do I know if it is correct?

rosyposyjm

This question is behalf of my mum, who is worried about how much money she is spending. I am trying to help her, but am afraid I don't really understand tax/pensions.

She was born in August 1947. She recieves a state pension and has recently inherited my late father's private pension. As well as this, she has some savings and shares. I think my questions are:

1) We have a letter from HMR stating that her tax code for this year is K72. Am I correct in thinking that this means she pays tax on pretty much all her income - is this correct?

2) She currently has a Financial Advisor who invests my dad's private pension and has been charged £1600 by this lady for managing the private pension - should she continue to use her?

3) My dad ran his own business and his accountant did all the accounts for the business and also completed self-assessments for my mum and dad. Now that there is no business (and all the loose ends have been tied up), does she need to use an accountant for her pensions/savings as the accountant also charges a hefty sum each year.

If anybody can shed any light on any of the above I would be very grateful.
Thank you,

greenglide

1) Against which income stream is this code applied? Have you checked the notice of coding? This will say how it is arrived at. This code means that she has untaxed income which is greater than the allowance - remember that the State Pension is taxable but not taxed at source. If her SP is greater than the allowance this will explain it.

2) Whether she needs to use the IFA depends on whether she can do it herself. The fact that you are asking these questions on an internet forum would indicate that you arent managing and an IFA or accountant may be needed to maybe simplify things.

3) For a "normal" person with multiple income sources but nothing complex (sounds like this is the case) filling in self assessment forms is a breeze (IMHO). The online service is very good and works. However if you do not understand income tax (see comment above) then somebody will have to do it. Having said that does HMRC actually require her to submit a SA or is the accountant simply completing it because they always have? (I do as a matter of course as I then KNOW it is right)

Your_Hero

rosyposyjm wrote: »

This question is behalf of my mum, who is worried about how much money she is spending. I am trying to help her, but am afraid I don't really understand tax/pensions.

She was born in August 1947. She recieves a state pension and has recently inherited my late father's private pension. As well as this, she has some savings and shares. I think my questions are:

1) We have a letter from HMR stating that her tax code for this year is K72. Am I correct in thinking that this means she pays tax on pretty much all her income - is this correct?

2) She currently has a Financial Advisor who invests my dad's private pension and has been charged £1600 by this lady for managing the private pension - should she continue to use her?

3) My dad ran his own business and his accountant did all the accounts for the business and also completed self-assessments for my mum and dad. Now that there is no business (and all the loose ends have been tied up), does she need to use an accountant for her pensions/savings as the accountant also charges a hefty sum each year.

If anybody can shed any light on any of the above I would be very grateful.
Thank you,

1) a K tax code means her "untaxed" income is higher than her taxable income and so it is added to the taxable income to calculate the right tax due (http://www.hmrc.gov.uk/incometax/codes-basics.htm)
In this instance, it would refer to her state pension being £720 more than her taxable income and since state pension is not taxed at source, they have to add it to her "taxable income" to collect this tax due.

2) If none of you understand pensions, then it would make sense to continue to use a professional to help. The fees would be relative to how much your dad has in his pension under management. Make sure she is an independent financial adviser (i.e. one that has no restrictions, no ties).

3) They would still need to complete self-assessments until the HMRC feels they no longer need to. So unless you or they can do the self-assessments for them, you probably should continue to use the accountant. They should be charging less now that there's no business though, is this not the case? Alternatively you could find another accountant who is willing to do it for cheaper.

jem16

rosyposyjm wrote: »

She was born in August 1947. She recieves a state pension and has recently inherited my late father's private pension. As well as this, she has some savings and shares. I think my questions are:

1) We have a letter from HMR stating that her tax code for this year is K72. Am I correct in thinking that this means she pays tax on pretty much all her income - is this correct?

The P2 Coding Notice that she received would explain exactly how it is made up. Some of it will be from the state pension which is paid gross but is taxable. Some of it may be underpaid tax from a previous year which may have come about due to the recent bereavement.

If you want to give the figures from that P2 we could explain it better for you.

2) She currently has a Financial Advisor who invests my dad's private pension and has been charged £1600 by this lady for managing the private pension - should she continue to use her?

If you know nothing about pensions then it would seem sensible to continue with an IFA. Whether £1600 is a good charge or not depends on the amount of the pension - how much is invested?

3) My dad ran his own business and his accountant did all the accounts for the business and also completed self-assessments for my mum and dad. Now that there is no business (and all the loose ends have been tied up), does she need to use an accountant for her pensions/savings as the accountant also charges a hefty sum each year.

I would imagine you don't really need the services of an accountant as your Mum's tax affairs should be pretty straightforward but it might be worthwhile asking HMRC if your Mum is still required to do a tax return.

I have taken over my Dad's tax return over the last few years. His affairs are fairly straightforward but he needed to do the short tax return as he was over the limit for the higher personal allowance. After we had sent in his tax return for 2013/14 he received a letter from HMRC saying it was no longer necessary. I suspect this is to do with the normal personal allowance catching up with the higher personal allowance in the next year or two. So it's perfectly likely that it would not be required for your Mum either.

rosyposyjm

If you know nothing about pensions then it would seem sensible to continue with an IFA. Whether £1600 is a good charge or not depends on the amount of the pension - how much is invested?

The current value of the private pension is £109,000 and my mum gets £7625 as a lump sum per year. Does a charge of £1600 per year sound reasonable for managing that? She is independent.

Re: Tax Return

On the Self Assessment Tax Return completed this year by the accountant, my mum was taxed on :
UK interest £3026
Dividends £861
State Pension £9788
Pensions £7625

We provided all the info to the accountant, so am assuming I just make sure I include everything when filling in the tax return.

Will wait to see what the accountant charges for this (as mum hasn't recieved a bill yet).



Also,
on the PAYE coding notice, it states that HMRC will tell the pension plan my mum's tax code and they will use this code to take off the right amount of tax each time they pay you from April 2014 - so does this mean that as from this year, the tax will be taken off the money that is paid out, rather than paying it later? (not sure why that wasn't the case this year??)

Thank you

jem16

rosyposyjm wrote: »

The current value of the private pension is £109,000 and my mum gets £7625 as a lump sum per year. Does a charge of £1600 per year sound reasonable for managing that? She is independent.

Almost 1.5%. If the IFA is getting all of that then no it's not good value. However I suspect you have misunderstood the charges and that's the total charges coming off each year - ie that would be the fund charge, the platform charge and the IFA's fee. Normally on £100k or over you would look to have the IFA receiving 0.5%.

Perhaps check on that?

On the Self Assessment Tax Return completed this year by the accountant, my mum was taxed on :
UK interest £3026
Dividends £861
State Pension £9788
Pensions £7625

Ok - interest and dividends would have been taxed at source anyway. The total is under the age related allowance limit so Mum should still get her whole allowance of £10,500 - I believe she just managed to get that higher allowance before it was abolished but perhaps you could confirm?

I don't think HMRC will require a tax return done as it will all be handled through PAYE and at source. Get Mum to phone and ask HMRC and then you won't need the accountant.

We provided all the info to the accountant, so am assuming I just make sure I include everything when filling in the tax return.

Yes that's all that's needed if a tax return is still required.

on the PAYE coding notice, it states that HMRC will tell the pension plan my mum's tax code and they will use this code to take off the right amount of tax each time they pay you from April 2014 - so does this mean that as from this year, the tax will be taken off the money that is paid out, rather than paying it later? (not sure why that wasn't the case this year??)

Thank you

First of all can you tell us how HMRC have made up the tax code of K72? It will say on the notice.

Your Mum is entitled to a personal allowance of £10,500 ( assuming she just made the higher allowance). Take off the state pension of £9788 and that's £712. This would normally give a tax code of 712L (or possibly P). So something else has lowered it by around £1432 - perhaps to take tax from last year?

Before your Mum got the private pension from your Dad, there was no means of taking any tax due if she only received the state pension plus savings interest and dividend income. However with savings interest normally taxed at source via the bank and dividend income already with a tax credit, she wouldn't have been due any more tax - in fact she should probably have got a refund from the savings interest tax. Was her savings interest paid gross?

rosyposyjm

Thank you

First of all can you tell us how HMRC have made up the tax code of K72? It will say on the notice.

Your Mum is entitled to a personal allowance of £10,500 ( assuming she just made the higher allowance). Take off the state pension of £9788 and that's £712. This would normally give a tax code of 712L (or possibly P). So something else has lowered it by around £1432 - perhaps to take tax from last year?

Before your Mum got the private pension from your Dad, there was no means of taking any tax due if she only received the state pension plus savings interest and dividend income. However with savings interest normally taxed at source via the bank and dividend income already with a tax credit, she wouldn't have been due any more tax - in fact she should probably have got a refund from the savings interest tax. Was her savings interest paid gross?

Yes, her allowance is 10500. The £9788 (on the tax return form for last year) was her pension for 2013-14 - her new code was calculated using her pension from the forthcoming year which is £11,234. I know that her pension increased from June last year (when my dad passed) - I can remember helping her sort that out - and am assuming that that is why the figures are different for the two years (as the increase was half way through the year). OR (reading it properly) it says "State Pension/State Benefits" (I'm not sure that she gets any benefits)
Anyway the Coding notice says: personal allowance £10500, state pension /benefits £11234 and that tax is due on -£734, which they say they turn into a tax code of K72. It says that when your total allowances are less than your total deductions they calculate a K code. and that she needs to pay tax on the excess amount of £734 so the pension plan will add this amount to her income and tax the total.
Hope that makes sense.

All the statements for her savings say that tax was taken from the savings at source - I would have to check the statements to check if it says "gross" - will do this.

The accountant has stated that she has to pay £1382-48 tax on the figures that I gave above from her self assessment Tax return. Does that sound wrong?

Thanks again

jem16

rosyposyjm wrote: »

Thank you

Yes, her allowance is 10500. The £9788 (on the tax return form for last year) was her pension for 2013-14 - her new code was calculated using her pension from the forthcoming year which is £11,234. I know that her pension increased from June last year (when my dad passed) - I can remember helping her sort that out - and am assuming that that is why the figures are different for the two years (as the increase was half way through the year). OR (reading it properly) it says "State Pension/State Benefits" (I'm not sure that she gets any benefits)

It's just the way they write it as all state payments are paid gross.

Anyway the Coding notice says: personal allowance £10500, state pension /benefits £11234 and that tax is due on -£734, which they say they turn into a tax code of K72. It says that when your total allowances are less than your total deductions they calculate a K code. and that she needs to pay tax on the excess amount of £734 so the pension plan will add this amount to her income and tax the total.
Hope that makes sense.

Makes perfect sense so the tax code is correct.

All the statements for her savings say that tax was taken from the savings at source - I would have to check the statements to check if it says "gross" - will do this.

Unless she had previously registered as a non-taxpayer, her savings interest should have been paid net of tax.

The accountant has stated that she has to pay £1382-48 tax on the figures that I gave above from her self assessment Tax return. Does that sound wrong?

That depends on whether any tax was taken off the private pension when she got it or not. Do you know if there was and how much it was?