pension/personal allowance question

kidmugsy

happyhero wrote: »

....
I see the personal allowance for people born after 5th April 1948 is 10,600 pounds. ...

The bit I don't understand is the personal allowance and how it works with the pension payments. All the illustrations seem to say you can take 25% tax free and the rest is taxed at my marginal rate but where does the personal allowance come in?

The unfortunate, inaccurate, and confusing expression "marginal rate" seemed to enter discussion after the 2014 Budget statement. Whoever wrote that part of Osborne's speech should be shot.

All that is meant is that after your tax-free 25%, anything further you draw from your pension is treated as income and taxed in the usual way. So the first £10,600 of your annual income will be tax-free, then there will be a 20% band, then a 40% band, and so on. Note that these bands apply to all your income added together.

The detail of how tax is taken from each component of income depends on whether you receive it gross (e.g. State Retirement Pension, rent, self-employed income ...) or after PAYE (e.g. final salary pension ...).

kidmugsy

happyhero wrote: »

Also what got me thinking is this, I was wondering if it is possible for me and my wife to each take only enough each year to stay under out personal allowance of 10600 so that we could bring in 21200 between us and yet not pay any tax each year if we maintain the personal allowance figures for the 2 of us.

And increase this each year inline with the personal allowance increases?

Yes. Using a wife's personal allowance is very tax-efficient. If she doesn't have enough money in a pension to exploit it fully, start contributing more for her.

bowlhead99

kidmugsy wrote: »

The unfortunate, inaccurate, and confusing expression "marginal rate" seemed to enter discussion after the 2014 Budget statement. Whoever wrote that part of Osborne's speech should be shot.

I agree with your explanation in this post of course as it is not rocket science. But a 'marginal rate' of anything is not exactly a confusing expression. Certainly marginal rates of tax were covered in any economics or business studies class at school at least twenty years ago; and from what I remember, Keynes was talking about marginal rate of this, that and the other back in the 1930s. He probably didn't coin the phrase either.

A marginal value is how much something happens when something else happens, and can change at the margins or edges of certain parameters. So if you earn £35k you are paying 20p tax on every new pound of salary you earn while at £75k you are paying 40p on every new pound etc. At £105k you are paying 60p on every new pound and at £200k you are paying 45p if you haven't already got bored of paying UK taxes and gone somewhere else. Meanwhile at only £5k of earnings you will be paying 0p on every new pound of income.

Most people know their marginal rate of tax and probably know (or could find out, if it was important to them) how much more of that marginal rate they have left before they get to a different marginal rate.

So I'm not sure that it should be so much of a big deal if the Chancellor of the Exchequer says that you can take a certain tax-free lump from your pension and then anything you take beyond this is taxed at your marginal rate. He doesn't need to say "and then anything beyond this is charged at 0% if your total income is £8000 and at 0% if your total income is £8001 and at 0% if your total income is £8002 and.... .... at 40% if your total income is £80000 and 40% if your total income is £80001 etc etc etc. "


I definitely agree with making the most of the wife's allowance. It seems that couples often overlook putting things into joint names or the wife's sole name when the husband is paying tax and the wife isn't. Or vice versa of course, no sexism implied. If the wife only has a nominal income or just basic state pension or benefits, she can can receive lots of pension income, employment income, savings income, investment dividends, investment gains, etc before her marginal tax rate changes to something over 0%. It is wise to exploit this.

Having said this, best not to rely on always having someone around who is able to access nil rate tax, and so putting money into tax wrappers such as ISAs (especially now existing ISA contributions can be transferred between spouses on death) is quite useful. If you can spend money that is not in an ISA first - rather than 'take the money out of my ISA tax free' making the total size of your ISA wrapper smaller and smaller over time - you will be on the right track. Use both people's ISA wrappers, both people's pension wrappers, both people's nil rate bands while you can.

atush

happyhero wrote: »

thank you thank you for all your help with this, ok going off subject a bit probably, but I have investments within ISA's that I am building up to take during my pension years and my main interest is to avoid tax so I am toying with the idea..........

do I need to worry about using my wife's years personal allowance vs forget about her personal allowance and take the money out as we fancy tax free from my ISA using it as our pension income so that everything stays in my name and simpler, rather than try to manage my investments within accounts under my wife's name as well as mine.

Yes, you need to take into acct your wife's PA if you wish to use her PA fully. Soon you will be able to use 1K of her unused portion, but I think with the conservatives out of office you can't count on this or it being extended to all of it as I hoped it would be.

So what is your wife's pension provision like? Is she still earning? If she has no pension, you should start one. And if she is earning, you could think about using some of your TFLS from your PPs to boost hers (there are recycling rules for you but not if you gift the money to her).

kidmugsy

bowlhead99 wrote: »

But a 'marginal rate' of anything is not exactly a confusing expression.

Of course not; used accurately it's a simple and handy idea. Used as Osborne used it, though, it's utterly confusing. The evidence for that is undeniable - just look at the posts here from people confused by it.

mgdavid

bowlhead99 wrote: »

I agree with your explanation in this post of course as it is not rocket science. But a 'marginal rate' of anything is not exactly a confusing expression. ...........

to 'us', no - but given the appallingly low standards of numeracy and literacy acquired by the majority of people from the education system I think it is not well understood at all. I'd be surprised if as many as 10% 'get it'.

OP - apologies for going off topic.