State Pension and Tax Code

wearespartans

I have just started to receive my state pension (July 2018). Why is my total pension for the year taken from my tax allowance instead of what I will be paid i.e. from July not April. This can't be unique. There must be lots of pensioners out there where this done. Any explanation ?

Mnd

The tax code relates to a year's earnings, not just from now, as long as your income is less than11850 (I think) for the year up till April 5th next year you wont pay any income tax

Linton

See https://www.litrg.org.uk/tax-guides/pensioners-and-tax/tax-code-problems-retirement about halfway down.


Is your tax code M1 ? If so, the tax charge is purely based on each individual month's income with an allowance of 1/12 th the tax code. The effect is that you only pay the extra tax for the months from when the tax code comes into effect.

wearespartans

My tax code will end in X which shows that they will review the tax I have paid after April 5 2019. What I can't get my head round is surely I will pay too much tax each month but will get it back later. What I am thinking is why can't they take my actual pension that I will be paid this financial year from my personal allowance so that I don't have to be given anything back. Am I missing something somewhere ?

BoGoF

You won't be paying extra tax each month. In fact if the code doesn't reach your pensiin provider/employer in time to be used this month, chances are you will be underpaid at year end.

molerat

The X also means it is on a monthly non cumulative basis. If they deducted how much you were actually getting then on a normal tax code you would take an immediate tax hit on the 4/12ths of that pension or on an X code you would face a bill at the end of the year. This way you get 1/12th of the full year pension deducted, the amount you actually get, each month. This is likely to be the most accurate way and will leave little or nothing to pay or reclaim. This only usually goes wrong when you have either had no income ytd and take the sp and private pension at the same time or you are a higher tax payer and drop to a very low private pension + sp.

wearespartans

State pension and tax is further complicated, because there are 13 payments per year. Since it is paid every four weeks and not monthly. The general consensus at the moment seems to be that the tax people know what they are doing. So I will bow to their judgement.

badmemory

The next question is - have the DWP told HMRC the correct amount of state pension for the year? As they can't manage it for a full tax year then I would check carefully for a partial year. Remember it is based on the number of pay WEEKS in the year not 4 weekly pay days.


Should I mention that for a full tax year the amount should normally be 1 week at the old rate & 51 at the new - not 52 at the new. Yes pedantic but under HMRC rules correct.

wearespartans

Have just received a letter from HMRC. They explain 'Instead of estimating what you may be paid from your birthday to the end of the tax year on 5 April 2019. we've added the amount of State Pension you would have received for the full tax year.
We've taken the amount of your State Pension from your tax allowance. Your tax free allowance is how much income you can receive in the year before you pay tax.

We've told your pension provider to use this tax code in a specific way, called a 'Week 1' or 'Month 1 basis'. this means that you're only taxed on the amount of state pension received in each week or month that your pension provider uses the new code. This means that you're taxed correctly on each payment where the new code is used.

I will have to have a sit down and ponder this. I am still missing something somewhere. Also surprised more pensioners don't seem to query this decision. Which also suggests that the problem is my own understanding of the matter.

[Deleted User]

I answered the same question on the cutting tax forum - hope it helps!



Your new code will apply for the remainder of the year to take into account your state pension. There are eight months left in the tax year and you will pay tax, therefore, on 8/12 of your annual pension as that is what you will receive between now and the end of the tax year.

comeandgo

Yes, it is your understanding. The tax code used as a month 1 code works.