Tax Question

33scott

I have only ever had one source of income and have always been taxed through PAYE so its a topic I'm not really sure about.
When I retire in 4 and half years my initial source of income will be my TFLS and I will initially drawdown at the rate of my personal allowance (£12,500) so no tax to pay in the early years. After another 5 years my DB will kick in then eventually my SP.
My question is who deducts the income tax, my DB company or  my DC provider and what happens when the SP starts to pay out, is that taxed at source?
Do I have to do a tax return? as I've never had to do one of those ever before?
Hope these questions don't sound too numpty.

Scallypud

I believe it is taxed at source but the experts on here will soon advise

Albermarle

There is no black and white answer . You do not need to fill in SA but you will have to communicate your preferences to HMRC where you would want the personal allowance to apply , to either the DB or DC . When the SP starts this will not be taxed directly but the value of the SP will be deducted from your personal allowance . So you will start to pay more tax on the DB or DC .
It can get a bit messy and the wrong tax taken to begin with so you need to keep a close eye on it.

Dazed_and_C0nfused

You will start with a tax code for your DC pension.  Once that is established it is likely to be 1250L so no tax to pay.

Once your DB pension starts you will get a second tax code for that of BR (basic rate).  You may find the emergency tax code is used on the first DB payment and as a result you will owe some tax to HMRC.

If you reduce your DC pension amounts when the DB pension starts then there may be some allowances available to use at the DB pension so if you dropped the DC pension to say £8k/year you would have tax codes of 800L (DC) and 450T (DB).  Assuming your DB pension is at least £4,500 and ignoring any tax you will likely owe.

Once your SP starts DWP always pay that in full with no tax deduction and your DC tax code will be adjusted to take that into account.  If you get the standard new State Pension of £9,110 then you might end up with tax codes of,
339L (DC) and BR (DB).  Assuming you are taking at least £3,390/year from the DC pension.

There should be no need to complete a Self Assessment just due to having multiple pensions however if they are very large amounts of taxable income then you might have to for other reasons i.e. HICBC or adjusted net income > £100k.

Msjf

I'm no expert, but have some personal experience of juggling tax codes and splitting the personal tax allowance.

You can choose, and chop and change, how you want your personal allowance apportioned once your taxable income comes from more than one source and exceeds or is predicted to exceed the personal allowance in a given tax year.

I have contacted the tax office several times over the years to make changes, and it's easy by phone, armed with each employer/pension provider name and PAYE reference, but you can only do this once your second or further employer or pension provider has set you up to receive payments and this shows on the HMRC's record for you.

I used to make in-year apportionment changes to ensure that I maximised the in-year benefit of the tax-free allowance when there were big changes in my work income from two sources: one my own company, the other a government department which paid me through its payroll for varying amounts of 'fee-paid' work.  Otherwise I would have needed sometimes to wait months until my next pay from one or the other source to make use of the personal allowance allocated to that income source.

Now I set my personal allowance against regular monthly SIPP drawdown income (£12,000 pa) with a bit left over against variable fee earnings. When I reduced my SIPP drawdown income for a period earlier this year (when the markets fell and until my portfolio recovered), I found the tax office just as helpful when I rang to arrange to use more of my personal allowance against my work income. I imagine they're under a lot of pressure at present, but you are several years off needing to contact them.

One thing to be aware of is that the HMRC system may over-estimate your income for the year and deduct higher-rate tax if you take a one-off taxable lump sum at any point or take taxable income from a new source while still receiving, or still on their system as likely to receive, income from an existing or recent source, for example if you haven't yet been processed as a leaver by your employer when you receive a first pension payment.

You may be able to prevent having excessive tax deducted or at least arrange to correct your tax code by next pension pay period by managing your personal tax account online, including using it to notify changes in your estimates of annual income from different sources and in order to access commonly needed forms. You don't need to be under obligation to fill in a personal tax self-assessment in order to manage your tax affairs online. Do look at other threads on here about the advantages of an online account (including checking NIC status, state pension forecast, etc). 

Albermarle

You don't need to be under obligation to fill in a personal tax self-assessment in order to manage your tax affairs online. Do look at other threads on here about the advantages of an online account (including checking NIC status, state pension forecast, etc). 

In fact I used to do SA but HMRC told me to stop and said to use the personal tax account instead . So far I prefer to use SA, as you see your tax calculation straight away , rather than waiting for it to be done at some point later .

Msjf

Yes, there are benefits - I still do SAs as we've only dissolved the Company this year, but I think my tax position will be simple enough next year (no capital gains, for example) to stop doing them.

The OP might find SA a bit daunting and/or an unnecessary administrative burden if totally unfamiliar with the regime however, and an online tax calculator might be a better way forward in conjunction with actively managing the online tax account in-year.

squirrelpie

No you don't have to do a tax return. Your state pension is taxable but is not taxed. That is, they pay you the complete amount and deduct the amount from your personal tax allowance. So you will have less personal allowance to 'spend' on other sources of income.

I didn't understand what you meant about TFLS and personal allowance? A TFLS is tax-free as its name says. Your personal allowance is irrelevant. When you start to take taxable income then your personal allowance begins to matter. You didn't say enough about your DC pension to be able to answer your other questions, except that in general I would suggest assigning whatever remains of your personal allowance to your DB pension once it starts to pay out and that will result in a BR code for your DC pension and all taxable income from it will be taxed at 20% (currently, that is).

You can phone HMRC to discuss where to allocate your personal allowance.