2 part question re: self employment & DB pension tax

skycatcher

Hi,
I am in a partnership (sole trader type rather than directors) with my wife. In the last couple of years we have split the profits in a 15:1 ratio in her benefit which is still less than the tax allowance.

I began receiving my DB pension from previous employment in Nov 19. In the first month I was taxed using code 1250L. I had applied to get the married allowance which came through on my Dec payslip as 1375M and ALL of the tax taken off in NOV was refunded. I've just received my Jan slip and it still shows tax code 1375M but they have not taken any tax off.
My question is why? Is it because I'm self employed and do my own tax return or is it just a screw up? The total income from the pension should be around £14k this financial year.

My second question is as I'm now a tax payer (or should be if they would take it off) can I opt to take no profit from the partnership but still be eligible for class 2 NICs?

Thanks for reading!

Dazed_and_confused

If the DB pension is your first PAYE income of the year then all looks correct.

Your tax code has been issued on a cumulative basis so each month you can be paid £1,146.58 from the DB pension without paying tax.

We are now in in the 10th month of the tax year so the cumulative amount you could be paid before tax is deducted would be £11,465.

In month 11 it will be £12,612.

And month 12 £13,759 so you will pay a small amount of tax in the final payment of this tax year.

From month 1 of the new tax year you start afresh so you will start paying a lot more tax then if your monthly pension is still more than £1,146/month*.
*this figure may change subject to what is announced in the budget.

This means you are using up all your Personal Allowance against your DB pension and any other income will be taxable at the relevant rate for the particular type of income.

If your share of the partnership profits is £0 you may be eligible to pay voluntary Class 2 National Insurance to protect your State Pension.

Have you checked your State Pension forecast on gov.uk to see what your current forecast is (not the first headline figure) and how much you can increase it by?

DaveMcG

As above - plus you can def pay class 2 without net profits from self employment ie expenses exceed revenue. However, you seem to be proposing something slightly different. You could of course just receive a nominal amount from the self employment, which although taxed would clearly allow a Class 2 and the small amount of tax paid be dwarfed by the savings in comparison to Class 3 conts.

skycatcher

Dazed_and_confused wrote: »

If the DB pension is your first PAYE income of the year then all looks correct.

Your tax code has been issued on a cumulative basis so each month you can be paid £1,146.58 from the DB pension without paying tax.

We are now in in the 10th month of the tax year so the cumulative amount you could be paid before tax is deducted would be £11,465.

In month 11 it will be £12,612.

And month 12 £13,759 so you will pay a small amount of tax in the final payment of this tax year.

From month 1 of the new tax year you start afresh so you will start paying a lot more tax then if your monthly pension is still more than £1,146/month*.
*this figure may change subject to what is announced in the budget.

This means you are using up all your Personal Allowance against your DB pension and any other income will be taxable at the relevant rate for the particular type of income.

If your share of the partnership profits is £0 you may be eligible to pay voluntary Class 2 National Insurance to protect your State Pension.

Have you checked your State Pension forecast on gov.uk to see what your current forecast is (not the first headline figure) and how much you can increase it by?

Thanks Dazed and Confused...that all makes sense...wonder why they took the tax off in the first month...but it heyho!

Yes, have checked my SP forecast and it says I have 6 more years to contribute for the max - I'm currently £25 approx away from that atm (I was contracted out for a large part of my DB).

skycatcher

DaveMcG wrote: »

As above - plus you can def pay class 2 without net profits from self employment ie expenses exceed revenue. However, you seem to be proposing something slightly different. You could of course just receive a nominal amount from the self employment, which although taxed would clearly allow a Class 2 and the small amount of tax paid be dwarfed by the savings in comparison to Class 3 conts.

Thanks DaveMcG - I have thought that allocating a nominal share of the profit mught be the safest way to go although no one wants to pay tax unnecessarily...just wonder how little would be suffice?

Dazed_and_confused

Thanks Dazed and Confused...that all makes sense...wonder why they took the tax off in the first month...but it heyho!

As it was pension income not a job (where a different procedure applies) the tax your employer would have deducted from the first payment would be based on the emergency tax code being used on a non cumulative basis.

Now that a cumulative tax code has been issued they can take the whole year into account i.e. you have had several months worth of unused tax code allowance to use up before tax needs to be deducted.