Tax collected through tax code will take income over higher rate tax threshold?

saver_ali

My husband owes £1434 from tax year 2019-20, when he retired and had a mix of earned income and pension. HMRC are going to collect it over  2021-22 through his tax code, which has reduced from 1257L to 808L, so reducing his personal allowance by £4481.

He now draws a pension of £50k a year, which means he is a basic rate tax payer. With this reduction in tax code, he will be £4481 over the higher rate tax threshold, so will he pay 40% tax on that extra amount (roughly £900 extra tax by my calculations)?

I wonder if we would be better to pay outstanding tax as a lump sum now, and get the tax code changed?

Or will HMRC realise that the total income is still below the £50k and it will all work out correct in the end? 

molerat

 Reducing his allowance by £4481 will not collect £1434 at 20% so it looks like they have worked out that the reduction will collect the correct amount with a mix of 40% and 20% tax. Is his expected pension amount for 21-22 correct on the tax portal because if that is wrong then it could skew the reduction amount.

My spreadsheet is not completely up to date for 21-22 but shows with a code of 808 he will pay £1740 more tax than on 1257

[Deleted User]

It’s up to you. Either it is paid in one lump sum or collected over a period of twelve months interest free. 

saver_ali

molerat said:

 Reducing his allowance by £4481 will not collect £1434 at 20% so it looks like they have worked out that the reduction will collect the correct amount with a mix of 40% and 20% tax. Is his expected pension amount for 21-22 correct on the tax portal because if that is wrong then it could skew the reduction amount.

My spreadsheet is not completely up to date for 21-22 but shows with a code of 808 he will pay £1740 more tax than on 1257

Thanks. That’s very helpful. By my calculations 1434 is 32% of 4481, so it does look like it’s a mix of 20 and 40% tax. 

Following your suggestion, we’ve just been on to the tax portal and corrected the estimated income for next year (and the current one). It had next year’s income as approx £48.5k. We’ve  changed that to 50k, so I would expect the tax code to be slightly adjusted.
From all this, I’ve concluded that he won’t lose out by having the money collected via his tax code.
Thanks again. 

molerat

On an income of £48.5K 808 would have collected £1440 extra tax.  Now you have declared £50K I would expect them to issue a new code of around 885.  Check again in a couple of days.

saver_ali

molerat said:

On an income of £48.5K 808 would have collected £1440 extra tax.  Now you have declared £50K I would expect them to issue a new code of around 885.  Check again in a couple of days.

Thanks. I’ve no idea where they got the £48.5k from, but hopefully it will be fine now.

It has been a bit complicated in the last few years, with income from his old employer, and various pension withdrawals, whether it be lump sums or drawdown.