£5000 nil band rate

bjbyorkshire

We had a straight forward tax affairs until 4 years ago, I could do the tax stuff for us both. Hubby still has a small, part time job which he loves so that is fine by me. We inherited our deceased daughters house which we had helped her to buy by drawing on our savings. We rented it out for just under 3 years. It's just been sold. No capital gain.

We employed both a solicitor and accountant to keep us on the straight and narrow but I do like to understand at least the principle of how things are worked out rather than just say "oh if the accountant says it's right it must be". He can only put down the figures that I supply him with after all.

It keeps the old brain cells ticking over.

Thanks to you all, we can close the thread here I think.

polymaff

bjbyorkshire wrote: »

Thanks to you all, we can close the thread here I think.

OK, but if that example was a representative one, your State Pension will be taxed at a rate approaching 40% - even if you are nothing like a higher-rate taxpayer.

So it might be worth considering my question.

bjbyorkshire

Polymaff, what do you mean?????

This is hubby's affairs were talking about. He is 71, has been drawing his state pension since age 65, occupational pension since 1990, not a lot has changed since last year except we sold a house we fully owned so next year, not this year have bank interest from the proceeds of the house sale.

He can't defer his pension as he's been drawing it for 6 years.

Why do you think he will have 40% tax to pay?

That's just ruined my whole day!! Eek!

polymaff

bjbyorkshire wrote: »

Polymaff, what do you mean?????

This is hubby's affairs were talking about. He is 71, has been drawing his state pension since age 65, occupational pension since 1990, not a lot has changed since last year except we sold a house we fully owned so next year, not this year have bank interest from the proceeds of the house sale.

He can't defer his pension as he's been drawing it for 6 years.

Why do you think he will have 40% tax to pay?

That's just ruined my whole day!! Eek!

1. From your above statement only, he could defer his state pension. You are allowed to defer your state pension twice. Once by not claiming it in the first place, and once during the payment life of the state pension.

2. Let's assume that the breakdown of the pension income you quote is £11k occupational plus £7k state pension. Next year, without the state pension, the occupational pension uses up the personal allowance, leaving the full £5k of SRA available. With the state pension no SRA is available. So, taking the state pension means that you pay income tax at 20% on the state pension PLUS you lose 20% income tax relief on up to £5k of savings income. That pushes the effective tax on the state pension to up to £2,400 - a rate of about 35%. An unintended (perhaps!) consequence of one of the Chancellor's wizard ideas.

You might argue that 71 is too late to defer as you need to draw a current pension for 10 years after deferral to get your total pension payments back, and you might argue - "doesn't this just defer the tax liabilty?" Well, not necessarily, as circumstances might change the SRA to make it less personally punishing at a later date - and that deferred benefit is inheritable.

Deferral is a complex and individual matter. I described virtually the same scenario as above to a couple, and two years later the deferred spouse - the one actuarily expected to live much longer than the other - contracted a non-operable brain tumour. Amongst all your "eeks" and ruined days you might care to count your blessings.

bjbyorkshire

Well, thanks for such a comprehensive breakdown Pollymaff.

This'll will require me to read and re read the above in the context of our situation.

I just had a chat with the accountant that we use and he didn't know that from next year bank interest will no longer be taxed at source and he also thought that the £5,000 allowance was only dividend income and not savings income. I sent him some reading material!

Yes, I count my blessings each and every day. I know I could be in a far, far worse situation than I am, we both have reasonable health whilst friends are going through all sorts of difficult situations. Our world was turned upside down by the very sudden death of our daughter and the stress led my oh to have a breakdown. I know that financially I have to be the one to look after our affairs. He lets me handle all such matters. I have learned so much from people on this forum and it all keeps the old grey matter ticking over.

We won't be deferring the state pension. It is going to be for me now to see which is our best way forward. Son and sole heir may get some early inheritance.

Thanks so much for your time.

polymaff

bjbyorkshire wrote: »

Well, thanks for such a comprehensive breakdown Pollymaff.

This'll will require me to read and re read the above in the context of our situation.

I just had a chat with the accountant that we use and he didn't know that from next year bank interest will no longer be taxed at source and he also thought that the £5,000 allowance was only dividend income and not savings income. I sent him some reading material!

Yes, I count my blessings each and every day. I know I could be in a far, far worse situation than I am, we both have reasonable health whilst friends are going through all sorts of difficult situations. Our world was turned upside down by the very sudden death of our daughter and the stress led my oh to have a breakdown. I know that financially I have to be the one to look after our affairs. He lets me handle all such matters. I have learned so much from people on this forum and it all keeps the old grey matter ticking over.

We won't be deferring the state pension. It is going to be for me now to see which is our best way forward. Son and sole heir may get some early inheritance.

Thanks so much for your time.

I find that the world of professional accountants doesn't have a grip yet on tax changes coming in in a fortnight's time - so your comments don't surprise me. To be fair, nobody really knows how HMRC are going to implement them until they publish a document laying out in logical format how they believe that their software will process the relevant tax returns. To put this in context, the document for 2015/16 only firmed up at the end of last (calendar) year - by which time it was up to Revision 13 !!

It didn't sound like deferral would be the right choice for your husband. In the case I outlined, the advice was taken at 63 - and rapidly reversed two years later. As it was based upon a pre 2016/17 state pension, the incentive of what is, effectively, a 10.4% regular saver with a slow-release - but index-linked - payback system, it made sense at the time, but fate can play cruel tricks on us all.