Tax code and old age pension

littlemoney

I am currently in recipt of an occupation pension and I qualified for my old age pension on 6 March 2016. This means that I will have approx 4 weeks state pension income in the current tax year.

I have just received notification of tax coding for year 2015/16 which quotes a tax code calculated on the basis of the of deducting the full annual amount my state pension in the current tax year from my personal allowance and then using a revised tax code for my occupational pension.

As I have not recived this amount of state pension in the current tax year, is the code correct?

molerat

Does the tax code have M1 after it, it usually does in these circumstances, which means this month's occupational pension will be taxed on a standalone basis and not cumulative so effectively only 1/12th of the annual state pension figure will be taxed.

polymaff

littlemoney wrote: »

I am currently in recipt of an occupation pension and I qualified for my old age pension on 6 March 2016. This means that I will have approx 4 weeks state pension income in the current tax year.

I have just received notification of tax coding for year 2015/16 which quotes a tax code calculated on the basis of the of deducting the full annual amount my state pension in the current tax year from my personal allowance and then using a revised tax code for my occupational pension.

As I have not recived this amount of state pension in the current tax year, is the code correct?

Don't panic! That revised tax code will only be used from its notification to your occupational pension provider until the end of the tax year - so, what, once - at most?

That is, it will only extract, from your occupational pension, the tax due on your month of State Pension.

DV

Edit: p.s. Bad Luck on the SPA!

jem16

polymaff wrote: »

Don't panic! That revised tax code will only be used from its notification to your occupational pension provider until the end of the tax year - so, what, once - at most?

Providing, as molerat said, it is being used on a Mth1 basis. If it was a cumulative tax code it would take for the preceding months too.

However it is usual for Mth1 tax codes to be used following a tax code change for the state pension and for it to use the annual pension figure so it is likely all is correct her.

polymaff

jem16 wrote: »

Providing, as molerat said, it is being used on a Mth1 basis. If it was a cumulative tax code it would take for the preceding months too.

However it is usual for Mth1 tax codes to be used following a tax code change for the state pension and for it to use the annual pension figure so it is likely all is correct her.

AIUI it just wouldn't happen. The tax code drops by about 600, so the employer's system takes 20% of 6000/12 extra tax each month thereafter

I've asked HMRC about this in the past. They tell me that if the taxpayer already has enough taxable non-Savings Income to already cause a liability to tax they get the State Pension that will actually be received in the first, partial, year recorded on their P2. If their current taxable non-Savings Income leaves them below that threshold, the P2 system records the figure for an entire year's State Pension.

She couldn't explain why, though :rotfl:

OP: You are obviously someone who keeps your eyes on the figures, so be aware that the State Pension uses the accruals system, meaning that the state pension you are judged to have received in you first, partial, year of receiving the SP will be likely to be greater than you've actually been paid in that tax year.

And they say that this is an era of tax simplification.

littlemoney

molerat wrote: »

Does the tax code have M1 after it, it usually does in these circumstances, which means this month's occupational pension will be taxed on a standalone basis and not cumulative so effectively only 1/12th of the annual state pension figure will be taxed.

The tax code number is followed by L and X. I assume this means it is cumulative. Am I correct?

polymaff wrote: »

AIUI it just wouldn't happen. The tax code drops by about 600, so the employer's system takes 20% of 6000/12 extra tax each month thereafter

I've asked HMRC about this in the past. They tell me that if the taxpayer already has enough taxable non-Savings Income to already cause a liability to tax they get the State Pension that will actually be received in the first, partial, year recorded on their P2. If their current taxable non-Savings Income leaves them below that threshold, the P2 system records the figure for an entire year's State Pension.

She couldn't explain why, though :rotfl:

OP: You are obviously someone who keeps your eyes on the figures, so be aware that the State Pension uses the accruals system, meaning that the state pension you are judged to have received in you first, partial, year of receiving the SP will be likely to be greater than you've actually been paid in that tax year.

And they say that this is an era of tax simplification.

Polymaff - I am not sure I understand what you mean what you mean by the accruals system.

My concerns is that my employer may tax me for a whole years state pension in the current year which I haven't received where as I think he should only increase my total tax paid by 20% of the amount of state pension I will receive. Will this new tax code do this?

molerat

X means the same as M1/W1 so you need not worry, tax will be taken as I indicated.

polymaff

littlemoney wrote: »

The tax code number is followed by L and X. I assume this means it is cumulative. Am I correct?

Polymaff - I am not sure I understand what you mean what you mean by the accruals system.

My concerns is that my employer may tax me for a whole years state pension in the current year which I haven't received where as I think he should only increase my total tax paid by 20% of the amount of state pension I will receive. Will this new tax code do this?

L indicates that you get the standard Personal Allowance. I guess that their first tax code was just an L without the X. The added X means that they regard this figure as non-binding and reserve the right to reassess it at the end of the tax year. Nothing to worry about.

Accruals means based on what you are due, not what you've been paid. Suppose you get your state pension (remembering that the SP is a weekly benefit) paid four-weekly, in arrears - as most folk do. If your last payment was, say 16 days before the end of the tax year, then your taxable pension in the tax year will include the week of pension that was due 9 days before the end of the tax year and the one due 2 days before the end of the tax year. Those two payments have "accrued", i.e. they're owing to you, but you haven't yet got access to them. This can affect the first, partial, year of your SP most of all. You can imagine that after the first year the jiggle at the start of the year tends to balance the one at the end of the year.

Your new tax code will do what I suggested - I hope. Your occupation pension payment will fall, due the change in the code notified, by the tax due on your state pension. Its just the way the system works, robbing Peter (your occupational pension) in order to pay Paul (HMRC) - but this will be a month-by-month process. There's no way your occupational pension will be docked of a year's-worth of SP tax in one go.

littlemoney

molerat wrote: »

X means the same as M1/W1 so you need not worry, tax will be taken as I indicated.

Thank you that's a relief. The government web site I found which explained tax codes letters does not list X so I didn't know that.

Polymaff - Thanks. It doesn't help that my first payment of approx of 3 weeks of state pension will be made on 31 March, just 5 days before the end of the tax year. I knew my occupational pension would decrease to pay for the tax on my state pension but I have learnt from previous experience HMRC is not always right.

molerat

http://www.payroll-help.com/faq/x-after-my-tax-code-mean/

polymaff

molerat wrote: »

http://www.payroll-help.com/faq/x-after-my-tax-code-mean/

Or, if they sent you a printed notification of your tax code (a P2), turn over the page. :)