How are tax codes assigned?

proformance

Hi guys,

I have a general question about how HMRC apportions tax codes to income.

For example, if I have "earned" the following values from the following mechanisms, how would HMRC assign tax codes:

1 PAYE - £13,000
1 state pension - £12,562
1 private pension A - £1,650
1 private pension B - £0 (no drawdowns)

What would the expected tax band be for each one of these items and how/when are they assigned?

Thanks,

Z

molerat

PAYE code 1

Pension A code BR

Pension B no code allocated unless you have previously taken something then it would be code BR

All assuming there are no other additions or deductions from your allowance and you do not live in Scotland.

They assigned at the beginning of each tax year unless there is a change mid year when the codes may not be allocated as expected as they need to take account of the year as a whole.  The SP is paid gross so that amount is deducted from your allowance thus taking the tax due from your main PAYE income.

proformance

molerat said:

PAYE code 1

Pension A code BR

Pension B no code allocated unless you have previously taken something then it would be code BR

Thanks for sharing this.
So even though someone goes over their allowance on aggregate, they still pay BR on mechanisms (such as the two pension schemes above), despite their overall earnings/income falling beyond the tax free annual allowance?

[Deleted User]

Hi,

state pension is not taxed though it comes off your personal allowance, then tax deducted from your income, have a look HERE, might help, and HERE.

proformance

Hi,

state pension is not taxed though it comes off your personal allowance, then tax deducted from your income, have a look HERE, might help, and HERE.

Good to know, thanks!

Still a bit confused. If the entire tax free allowance is utilised by PAYE + state pension, how come other items (like private pensions) are still taxable at the BR?

Dazed_and_C0nfused

proformance said:

molerat said:

PAYE code 1

Pension A code BR

Pension B no code allocated unless you have previously taken something then it would be code BR

Thanks for sharing this.
So even though someone goes over their allowance on aggregate, they still pay BR on mechanisms (such as the two pension schemes above), despite their overall earnings/income falling beyond the tax free annual allowance?

Yes, each source is looked at one after the other.

If pension A was the first one you started you would have a K code their (to collect the tax due on the £1,650 and State Pension) and BR at PAYE (earnings?).

You wouldn't have a tax code at pension B until you had taken some taxable income.

The first payment from pension B would have the emergency tax code (1257L) operated against it on a non cumulative basis.

But the simplest sequence is how molerat has set out, albeit when (if) the earnings stop you will need new tax code at pension A

Dazed_and_C0nfused

proformance said:

Hi,

state pension is not taxed though it comes off your personal allowance, then tax deducted from your income, have a look HERE, might help, and HERE.

Good to know, thanks!

Still a bit confused. If the entire tax free allowance is utilised by PAYE + state pension, how come other items (like private pensions) are still taxable at the BR?

You seem to be suggesting that someone who has 5 jobs each earning say £11k/year shouldn't be paying tax as each job is less than the Personal Allowance?

You only get one Personal Allowance whether you have 1 job no job or 100 jobs.  Same with pensions.

molerat

proformance said:

molerat said:

PAYE code 1

Pension A code BR

Pension B no code allocated unless you have previously taken something then it would be code BR

Thanks for sharing this.
So even though someone goes over their allowance on aggregate, they still pay BR on mechanisms (such as the two pension schemes above), despite their overall earnings/income falling beyond the tax free annual allowance?

BR means you have no allowance to use on that stream and pay basic rate tax at 20% on all of the income from that source.  If all the total £27212 came from one source you would be paying 20% on the £14642 above the £12570 tax allowance.  With the codes split over the different income streams in this way you are paying tax at 20% on £14640.