Explain my tax code

bigfreddiel

Can someone explain my tax code before I spend an hour holding onto the HMRC help line.

I fill in a tax return every year and Owe Nothing

This year I have been given a K code, K codes are to pay for unclaimed tax through your wages. I understand that. I don't understand the value the have applied, so here are the details

My income is like this:

Pension 1 £3269
Pension 2 £9718
State Pension £7947
Job Part Time £22735
Interest Untaxed £2123
=====
Total £45792

Tax free amount works out to £971
From my notice of coding
Personal Allowance £11000
Personal Savings allowance £500
Total £11500
Less State Pension £7947
Less untaxed interest £2123
Less Adjustment to rate bands £223
Less higher rate tax adjustment £236

Comes to the total tax-free amount of £971 - that;s fine and I understand that.

Then it says my tax-free amount is used as follows:

Pension 1 £6760 is added to income - K675
Pension 2 £7731 of this is tax free 773T
Part time job £0 is tax free BR

This totals your tax-free amount £971

I understand it all except for Pension 1 - where does the £6760 added to my income come from?

Cheers fj

teddysmum

bigfreddiel wrote: »

Can someone explain my tax code before I spend an hour holding onto the HMRC help line.

I fill in a tax return every year and Owe Nothing

This year I have been given a K code, K codes are to pay for unclaimed tax through your wages. I understand that. I don't understand the value the have applied, so here are the details

My income is like this:

Pension 1 £3269
Pension 2 £9718
State Pension £7947
Job Part Time £22735
Interest Untaxed £2123
=====
Total £45792

Tax free amount works out to £971
From my notice of coding
Personal Allowance £11000
Personal Savings allowance £500
Total £11500
Less State Pension £7947
Less untaxed interest £2123
Less Adjustment to rate bands £223
Less higher rate tax adjustment £236

Comes to the total tax-free amount of £971 - that;s fine and I understand that.

Then it says my tax-free amount is used as follows:

Pension 1 £6760 is added to income - K675
Pension 2 £7731 of this is tax free 773T
Part time job £0 is tax free BR

This totals your tax-free amount £971

I understand it all except for Pension 1 - where does the £6760 added to my income come from?

Cheers fj

I believe there is a rule which says they can't take more than a certain portion of some pensions in tax.


They are letting you have pension 2 with £7731 tax free, but you only have £971 allowance unused (after above deductions).


£7731-£971 is £6760 so this allowance is claimed back by adding onto your first pension's tax in the form of a K code. (ie your second pension is taxed on an extra £6760 .)


They did something similar to my husband's wages, last year because his pension provider didn't deduct tax for the first few months that he drew it. (ie he had a K code which meant he paid full tax on his wages plus an extra tax amount on the K coded sum).

Linton

Total allowance is £971. But you have been given £7731 allowance for P2. Therefore you need £971-£7731=-£6760 allowance for P1. A K code is simply a negative allowance.

bigfreddiel

Excellent, thanks everyone fj

bigfreddiel

Teddysmum, you've explained this really well, easy to see why HMRC need to claw back £6760 from P1. Now P1 is only £3269, so how does a K675 code work when its applied?

Does it act like virtual income so my tax is 20% or is 40% of £6760, i.e. £1352 or £2704 tax to be paid, taken monthly P1 will have a tax deduction of £112 or £224? This pension was only paying £272/month so I could see a lot less next month! Is that correct?

Second question, how can I reduce this if I've crept into 40% territory?

Pay into a SIPP maybe and get 40% tax relief.

Or cut down my hours on the part time job?

Final question, the figures at the and of the tax year won't be as high as the estimates, because my SP is only paid for 9/12ths of the tax year, and the interest untaxed will be lot less as I've move £30k into my and my wife's ISAs. So my total income may well just dip below the 40% tax level.

Cheers everyone fj

teddysmum

I don't know about the 40% tax as my husband is a basic tax payer.


With a K code, the whole of the income it's attached to is taxed, together with the K amount.

[Deleted User]

bigfreddiel wrote: »

Teddysmum, you've explained this really well, easy to see why HMRC need to claw back £6760 from P1. Now P1 is only £3269, so how does a K675 code work when its applied?

Does it act like virtual income so my tax is 20% or is 40% of £6760, i.e. £1352 or £2704 tax to be paid, taken monthly P1 will have a tax deduction of £112 or £224? This pension was only paying £272/month so I could see a lot less next month! Is that correct?

Second question, how can I reduce this if I've crept into 40% territory?

Pay into a SIPP maybe and get 40% tax relief.

Or cut down my hours on the part time job?

Final question, the figures at the and of the tax year won't be as high as the estimates, because my SP is only paid for 9/12ths of the tax year, and the interest untaxed will be lot less as I've move £30k into my and my wife's ISAs. So my total income may well just dip below the 40% tax level.

Cheers everyone fj

Tell HMRC about the interest reduction.
On the pension question, is the code followed by a w1 or m 1 ? Iff so it is correct to include the full pension for the year. The m1 will take no account of your earnings or allowances from earlier in the tax year- only going forward on a month by month basis.

Don't reduce your hours. Would you rather have,say, £100 after tax or nothing?

bigfreddiel

teddysmum wrote: »

I don't know about the 40% tax as my husband is a basic tax payer.


With a K code, the whole of the income it's attached to is taxed, together with the K amount.

That sounds right P1 was paid tax free because I had a tx code equal to the pension.

So it looks like £224 tax out of my £272 income next month! Ah well it's made up elsewhere! The penalties of being a higher rate tax payer.

I never dreamed this would happen after I retired!

Cheers fj

[Deleted User]

bigfreddiel wrote: »

That sounds right P1 was paid tax free because I had a tx code equal to the pension.

So it looks like £224 tax out of my £272 income next month! Ah well it's made up elsewhere! The penalties of being a higher rate tax payer.

I never dreamed this would happen after I retired!

Cheers fj

No this cannot be the case - no more than 50% of an income can be taken in tax in any pay period- see my previous point regarding m1 codes.

http://www.hobbspayrollservices.com/blog/?p=3044

bigfreddiel

[Deleted User] wrote:

No this cannot be the case - no more than 50% of an income can be taken in tax in any pay period- see my previous point regarding m1 codes.

http://www.hobbspayrollservices.com/blog/?p=3044

Well that should be interesting, and nice link much appreciated cheers fj