Tax Coding

Bolkowbob

Some advice would be very much appreciated on the following. New to the forum so apologies if this is a repeat on an old subject.

Retired at 60 and started taking a pension this year at 64. Have been issued a Tax Code that is under the normal single persons 12570L. When I enquired with the Tax Office why I was told it has been reduced because of interest earnt on savings that had been passed to them by NS&I. The interest is well under the PSA of £1000, are the correct or should my tax code be 12570L. Basically are you allowed to earn up to £1000 over and above your PAYE tax code on interest without it affecting the code?

chrisbur

Are you actually going to pay any tax under the new tax code?

Dazed_and_C0nfused

You've misunderstood the taxation of interest.

To use the savings nil rate band (aka Personal Savings Allowance) you have to have taxable income of at least £16,311 (£17,570 if you haven't applied for Marriage Allowance).

So the tax code is almost certainly because you have insufficient income to use either the savings starter rate band or savings nil rate band (aka Personal Savings Allowance).

As your income is low the interest is using up some of your Personal Allowance.

If you had a pension of say £14,000 then the interest would be taxed under the savings starter rate (0%) and you still wouldn't benefit from the savings nil rate.

If you think you will pay tax on your pension because of this then something is wrong, probably HMRC's estimate of your pension income.

Bolkowbob

No I am confused and that's not .com

Please correct me as I go.

My understanding was your tax code entitled you to earn that figure before paying any tax? 12570L equates to £12570

The taxable pension I will draw down on for the year will be less than the current tax code they have assigned me?

The figure you refer to of £1750 would be the "Starting Rate for Savings" and is it not UP TO not AT LEAST that amount, that being the maximum? Then as long as you are under that, every £1 you earn over your tax code reduces the "SRS" by £1? This is only for "non-savings taxable income" so would not involve interest from saving anyway?

As an example, you have pension income of £13,000 and savings income (interest) of £2,000, you will have total income of £15,000. This is less than £17,570, so you should be eligible for the starting rate for savings. Deduct the personal allowance, lets say £12,570 from the pension which leaves £430 left to be taxed at 20%. The starting rate for savings applies to the first £5,000 of taxed income that is savings income. In this case, the starting rate for savings £4,570 of savings income. As the savings income is only £2,000, then its ‘taxed’ at the starting rate for savings, which is 0%?

Therefore surely any income totalling (pension + Interest from savings) that is under or at the issued tax code (personal allowance) is not going to be levied by tax, that would be taking the mic wouldn't it?

Please keep it coming 

Dazed_and_C0nfused

The taxable pension I will draw down on for the year will be less than the current tax code they have assigned me?

So that means that you have some Personal Allowance that is available to be used by the interest and no tax will be deducted from your pension.

If your pension was more than your Personal Allowance then there would be no spare allowances and no interest entry in your tax code (assuming it was all due to be taxed at 0%).

molerat

In simple terms you have another taxable income stream, albeit likely taxable at 0%, and they deduct that, as they do any other not taxed at source income, amount from your tax code.  If your main income stream is still below this adjusted code amount then you will pay no tax. They only do this if your main income is below your personal allowance.  Stupid I think and, from personal experience, many hours of phone handler's and customer's time is spent sorting this out where they have not got it right.  But who ever said the tax system made sense !

Bolkowbob

OK help me on this and may be I will shut up

Total taxable income of £19,000, made up of £11,000 pension and £8,000 savings interest.

Earned income uses £11,000 of personal allowance of £12,570, leaving £1,570 to go against savings income. This means only £6,430 of savings income is liable to tax.

Savings income £5,000 @ 0% leaving £1,430

Savings income £1,000 @ 0% leaving £430 taxed @20% £86 to pay in tax?

Not like this if you cut the personal allowance by the savings interest and no savings income is applied (£5000 + £1000)

Tax code reduced personal allowance to 4570 set against savings interest of £8000.

Now pension payment of £11,000 subject to tax on £6430 @20% £1286

If you apply the savings income its swings and roundabouts, but I find the first method easier to get my brain around.

Thought retirement was when you got to put your feet up!!

Dazed_and_C0nfused

In that situation there would be an adjustment to your tax code so that your pension will be taxed and the (majority of the) £86 tax collected.

Personal Allowance £12,570
Less interest £2,000
Tax code allowances £10,570
Tax code 1057L

Taxable pension £11,000 with tax code of 1057L used = £84.20 tax deducted

Bolkowbob

So the example above is correct?

Its all apples and pears which ever way you dice it up on a basic allowance you have £18570, £12570 earnings + £5000 Starting rate + £1000 personal savings allowance. Irrespective what they do to your tax code, until you go over no tax, happy days.

Thanks

Malchester

I am in the same position and it was very confusing to begin with. I have 2 pensions at the moment paying under the personal tax allowance. My taxable savings interest is very small and therefore is taxed at 0% and, added to my pension income does not take me over the basic tax allowance. I was confused to begin with when HMRC reduced my tax code by the amount of interest I would be receiving this year. But, as someone has said, it is swings and roundabouts. I pay not tax at the moment until 3 years time when another pension and my state pension both kick in.

Dazed_and_C0nfused

At which point the interest deduction would be removed from your tax code (assuming it was small enough to be taxed at one of the 0% rates instead of using up some of your Personal Allowance).