Tax Pension & Earnings

Bobbydue

Hi All, just looking for a little guidance.

I have a part time job paying less than my Taxable Allowance, I'm also in my employers final salary pension scheme.

I'm about to draw a previous employers small pension that will when added together with my part time job take me over my my taxable allowance.

My question is, my employer would normally give me tax relief on my pension contributions but because I don't pay tax on their salary, how would I claim tax relief on my contributions given that putting my salary and my previous pension payments together takes me over my tax free allowance.

thank you for reading and I hope that makes sense. 

Dazed_and_C0nfused

Are your pension contributions made using the "net pay" method?

Bobbydue

I'm not sure what that means, previously my pension contributions were taken out before Tax was taken.

Does that help?

jimpwarsop

your employer wont start deducting tax, HMRC will work it out at the end of this year.

If the situation is the same next year HMRC will apportion your allowance across your two income streams.

Say your tax code is 1275, and your taxable income from "work" (after pension contributions) is £10k and your pension income is £4k.Then for 22/23 they will probably put £3750 of allowances agains your pension, and £9000 of allowances against your salary/wage.

Dazed_and_C0nfused

Bobbydue said:

I'm not sure what that means, previously my pension contributions were taken out before Tax was taken.

Does that help?

Net pay is where you earn a salary of say £8,000 and the pension contributions of say £400 are deducted making your taxable pay (the amount that goes on your P60) £7,600.

If that is how you contribute (common with final salary schemes) then the good news is that there is no tax relief for you to claim.

You wil automatically receive the maximum possible tax relief I the same way that you do now, by your taxable income being reduced.  That means you will have more Personal Allowance available to be used against your new pension, reducing the tax you would otherwise pay.

If that doesn't make sense then could you provide 3 figures,

Salary

Pension contribution %
Annual pension you about to start

Bobbydue

So basically, the Tax man will see both income streams and see my pension contributions and make the relevant adjustments?

Dazed_and_C0nfused

jimpwarsop said:

your employer wont start deducting tax, HMRC will work it out at the end of this year.

If the situation is the same next year HMRC will apportion your allowance across your two income streams.

Say your tax code is 1275, and your taxable income from "work" (after pension contributions) is £10k and your pension income is £4k.Then for 22/23 they will probably put £3750 of allowances agains your pension, and £9000 of allowances against your salary/wage.

Sorry but other than no tax likely to be deducted on the first payment the rest of that isn't what is likely to happen.

Dazed_and_C0nfused

Bobbydue said:

So basically, the Tax man will see both income streams and see my pension contributions and make the relevant adjustments?

Not quite.

HMRC will see that your taxable income (using my example) is only £7,600, not £8,000.  

And your tax code for the new pension will be calculated based on that.  The salary (using my example) of £8,000 is irrelevant for income tax purposes.

Bobbydue

Salary 12k
Pension Contributions 5.8%

Annual Pension 4.2k

Current Tax Code 1420L

Bobbydue

If it helps I work for the local council

Dazed_and_C0nfused

Do you know why your tax code is so high?

It may be correct but possibly not.

Assuming for now that it is correct then you have taxable earnings of £11,304.

Once your pension starts this tax code is likely to be reduced to 1130L.  Which means no tax will be deducted until your average weekly/monthly pay is greater than 11309 on an annualised basis.

Your tax code at the new pension would probably be 290T.  Meaning tax of about £21/22 would be deducted from your pension each month.