Unexpected situation

planningtogo

Hi I had planned to take early retirement 31.03.17 but due to ill health my employer will continue to pay me for another 6 months which was very unexpected.
My wage is £60k plus a pension of £9k that I'm already drawing ( taxed at 40%) and I'm paying 32% into the firms pension plus the firm is paying in 10%

My question is should I continue with my pension subs at this rate for another 6 months? My thoughts are I'm getting 40% tax relieve but this will be clawed back at some point as I will not earn more than 39k this tax year.
Should I inform the tax office now?

kidmugsy

planningtogo wrote: »

my employer will continue to pay me for another 6 months which was very unexpected.

...I'm paying 32% into the firms pension plus the firm is paying in 10%

My question is should I continue with my pension subs at this rate for another 6 months?

In your shoes I'd

(i) Consider reducing my pension contributions to whatever rate would guarantee that I still harvest all the employer's contribution. I say "consider": it might still be attractive to you to continue. You'll never again have an opportunity to bung so much into your pension.

(ii) I wouldn't tell HMRC anything until there is an actual fact to report, namely my retirement. And I imagine that they'll automatically find out about that soon enough.

So, no: don't tell the tax office now; in fact don't tell them at all. They'll take care of the business anyway.

planningtogo

I spoke with the firms FA last week and I explained my concerns regarding tax relieve on pension subs .
He told me the extra relieve will not be taken back , I still do not understand how that can be as I will not be a 40% tax payer this tax year , he said it was because the contributions at taken before tax is applied I'm sure the tax man will take the additional 20% relief back at the end of the tax year........hope I'm wrong:

Linton

planningtogo wrote: »

I spoke with the firms FA last week and I explained my concerns regarding tax relieve on pension subs .
He told me the extra relieve will not be taken back , I still do not understand how that can be as I will not be a 40% tax payer this tax year , he said it was because the contributions at taken before tax is applied I'm sure the tax man will take the additional 20% relief back at the end of the tax year........hope I'm wrong:

Many employers take pension contributions from your gross pay before calculating the tax due. So you don't get a tax refund because the money is never taxed in the first place. If you are a 40% tax payer even after the pension contribution is deducted then you will be due a refund once you stop working.

planningtogo

OK thanks for your reply , I'm worried because as I am paying 32% into pension fund my tax code is very high (1750L) I'm hoping the tax man doesn't want me to refund this later in year

Linton

planningtogo wrote: »

OK thanks for your reply , I'm worried because as I am paying 32% into pension fund my tax code is very high (1750L) I'm hoping the tax man doesn't want me to refund this later in year

From the infomation you give the tax codes are about correct for the full 2017/2018 year...
Salary £60K, Pension payment £19.2K. Pension £9K taxed at 40%.....

You are paying:
Employment income after deductions=60K-£19.2K-£17500=£23.3K
Tax on £23.3K @20% =£4.66K
Tax on pension income=£9K @ 40% = £3.6K
Total: £8.26K

You should be paying:
Total income after deductions=£69K-£19.2K-£11.5K=£38.3K
Tax on £38.3K=£33.5K@20%+£4.8K@40%=£8.62K

Which is near enough if your figures are approximate or there are other factors in your tax allowance. So the extra £6K allowance for employment is because you are paying more higher rate tax on your pension than you should.

If you stop employment earnings early you should actually get a small tax refund as you shouldnt be paying any higher rate tax on your pension.

planningtogo

Thanks very much for replying, you have all been very helpful, It's a lot clearer now

Dazed_and_confused

planningtogo

I would take comments in this thread and the FA advice with some caution as I think your concerns are well founded.

The FA may be correct about any pension deductions made before tax but it's your tax code that is the problem.

1750L is pretty high code and I presume includes an element to give some 40% tax relief but as you said in your original post you are not going to be a 40% payer this year then you may end up owing tax (possibly mitigated by what happens tax code wise after you end your employment).

You may more accurate help if you could post up some specifics about your position rather than everyone, FA included I would guess, making assumptions.

Expected taxable pay from the job (i.e. after pension contribution paid at source before tax)
Expected pension you will receive
Any new sources of income?
Pension contributions into a sipp/private pension
The make up of your tax code (you can check it on personal tax account on gov.uk if you don't have the code notice available).

planningtogo

Hi I will be paid by my firm for 6 months of this tax year :
I will be paying £1642 into my pension and the firm will add another £513
I take home £2492 PM after pension subs and N/I from my firm and approx. £492 PM from second pension which is taxed already at 40%

I have no other taxable income

After my last wage from work I intend to use some of the 25% tax free money from my main pension to see me through until April 2018 .

The way I'm looking at the situation is : approx. £30000 before tax from firm and approx. £10000 from pension = £40000 in tax year 2017/18
I'm struggling see how I can maintain such a high tax code

Dazed_and_confused

Me too, potentially a big tax bill coming your way so sooner you sort it out the better.

Linton

planningtogo wrote: »

Hi I will be paid by my firm for 6 months of this tax year :
I will be paying £1642 into my pension and the firm will add another £513
I take home £2492 PM after pension subs and N/I from my firm and approx. £492 PM from second pension which is taxed already at 40%

I have no other taxable income

After my last wage from work I intend to use some of the 25% tax free money from my main pension to see me through until April 2018 .

The way I'm looking at the situation is : approx. £30000 before tax from firm and approx. £10000 from pension = £40000 in tax year 2017/18
I'm struggling see how I can maintain such a high tax code

You are looking at it wrongly. Under PAYE your tax code deduction is accounted for at the rate of 1/12th for each month, so you only get £8750 employment income tax relief as your employer only pays you for 6 months.

What you should pay....
Your total income in the year is £39000 out of which you pay 10000 pension. So your taxed income will be £29000-£11500= £17500. Total tax due on £17500 @ 20% is £3500.

What you actually pay...
With your 1750L tax code your taxed income for employment over 6 months is:
£30000-£10000-£17500/2=£11250. Tax paid on employment= £11250 @20%=£2250.
Tax paid on £9K pension at 40%=£3600.
So total tax paid=£5850.

So if your pension continues to be taxed at 40% for the whole year you will be due a £2350 refund.
The reason for the high tax code is the pension being taxed at 40% when you arent a higher rate tax payer.

To hopefully make things even clearer - when you have multiple sources of income each "employer" has a separate tax code and the tax calculation is carried out by each employer assuming that you have no other source of income. In your case the pension provider has been told by HMRC that you have a zero tax code and that you are a higher rate tax payer. Tax codes with multiple sources of income can get very complicated if each individual income is below a tax band whilst the total is above.