State Pension - Personal Allowance

Quarkrad

Sorry - bit of a numpty here!  I have been receiving a private pension for some time and my tax code is calculated by deducting my personal allowance from the gross income.  All nice and simple (my personal allowance is 12500 + 1250 from wife).  Next month I will additionally receive the state pension - which in my case is 8166.  I thought the new tax /tax code would be calculated by adding the 8166 to my private pension and then deducting my personal allowance of 13750.  But what seems to be the case is the state pension amount of 8166 is taken off my personal allowance of 13750 making my new personal allowance 5584.  Is this right?  Or am I completely wrong in thinking the state pension is simply added to my private pension and then my personal allowance of 13750 is deducted to calculate the taxable amount?

Paul_Herring

Your state pension is taxable, but not actually taxed at source (you receive the gross amount,) so it needs to be taxed via your other income, hence the reduction of your tax code on your private pension.

Quarkrad

I see this but I pay 20% tax on my private pension.  Adding the state pension to my private pension does not take me to the next tax rate. So the gov want my previous employer to pay them the tax due to the state pension, which I assume is 20% of 8166 = 1633.  But comparing my take home without state pension to that with state pension I will be paying 20% tax on my private pension and 47% tax on my state pension when all the pension is taken off the personal allowance.  Why is it not calculated by adding the state and private pensions together and then taking off the personal allowance?

Paul_Herring

I see this but I pay 20% tax on my private pension. 

Except on the first £13,750. Which is what a tax code of 1375L would do.

 But comparing my take home without state pension to that with state pension I will be paying 20% tax on my private pension and 47% tax on my state pension when all the pension is taken off the personal allowance.  

What tax codes do you have before and after? How are you calculating that 47%?

 Why is it not calculated by adding the state and private pensions together and then taking off the personal allowance?

That's what the effect of reducing the tax code from 1375L to 559L (or maybe 558L) on your private pension does.
What have they actually moved from and to? And if it's not those numbers, or close to them, do you have any other income that may be being taken into account?

xylophone

Re calculation of Marriage "Allowance" - see 

 https://www.tax.org.uk/media-centre/blog/media-and-politics/when-allowance-not-allowance-and-why-does-it-matter

https://www.litrg.org.uk/tax-guides/tax-basics/what-tax-allowances-am-i-entitled

because the example given below is based on a very simple two income streams only - nothing else.

Let's suppose  a person's only income is a private pension of  £15,500 a year.

Standard tax  allowance is £12500.  Therefore he must pay tax at 20% on £3000 of his pension - £600 a year.  However, he is in receipt of marriage allowance  which gives him a tax credit of £250 so that his tax bill is reduced to £350 a year.
Like this

Total Income  15,500                           15,500
PA                   12,500                           13,750
Total taxable      3000                             1,750
Tax due                 600                              350.
Less MA                250
Tax due                  350.

Now he receives his state pension of £8000 - it is paid gross but he needs to pay tax at 20% on the whole amount - he owes 1600 on his pension, in addition to the £350 mentioned above.


Total income     23,500                        23,500             
PA                     12,500                        13,750                     
Total taxable      11,000                         9,750
Tax due                2,200                         1,950
Less MA                  250
Tax due                  1950

HMRC needs to find a way of collecting the tax unpaid on the state pension.
Thus, reduce the tax code on the private pension to  5750M.

Private Pension     15,500                          15,500
PA                            4,500                            5,750              
Total taxable            11,000                           9,750
Tax due                      2,200                            1,950
Less MA                        250
Tax due                       1,950

But remember, the above is uncomplicated by interest/dividends/ rental income/royalties/trust income etc etc etc

GibbsRule_No3.

My SP is “paid in full”, thus most of my personal allowance, then my two other pension are BR tax and my wages have the rest of PA taken off and is then BR taxed, since all four don’t add up to the higher tax rate.

Quarkrad

Finally spoke to HMRC.  What they are doing, in my case, is to reduce my personal allowance to 5584 and apply that to my private pension only - i.e. not applying anything to the state pension.  The effect of this, when I do the numbers, is the equivalent of keeping my private pension taxed at 20% and the additional state pension taxed at 20% - so I am happy,  My issue was sending me the change in tax code with no explanation of how it is all calculated.  There are various ways of doing it I guess but the method HMRC choose is to leave the state pension alone and take everything (tax wise) off the private pension.  Which amounts to what has been said above.  Thanks to all for helping me out.

nigelbb

Quarkrad said:

Finally spoke to HMRC.  What they are doing, in my case, is to reduce my personal allowance to 5584 and apply that to my private pension only - i.e. not applying anything to the state pension.  The effect of this, when I do the numbers, is the equivalent of keeping my private pension taxed at 20% and the additional state pension taxed at 20% - so I am happy,  My issue was sending me the change in tax code with no explanation of how it is all calculated.  There are various ways of doing it I guess but the method HMRC choose is to leave the state pension alone and take everything (tax wise) off the private pension.  Which amounts to what has been said above.  Thanks to all for helping me out.

This is the way that HMRC always handle tax on the state pension which is always paid in full without any deduction of income tax.

comeandgo

There is never tax deductions from state pension.  All deductions are from employment or private pensions.

Alter_ego

comeandgo said:

There is never tax deductions from state pension.  All deductions are from employment or private pensions.

How does that work if only income is state pension? 
PS My state pension is above the personal allowance. ( I deferred)

Marcon

Alter_ego said:

comeandgo said:

There is never tax deductions from state pension.  All deductions are from employment or private pensions.

How does that work if only income is state pension? 
PS My state pension is above the personal allowance. ( I deferred)

State pension itself is never paid net of tax. In your case, you'll get a bill for the tax due.