Partial Retirement- do you have different tax codes for Pension/Salary

drummersdale

I am looking to start partial retirement (2.5 days a week) in August - will I have one tax code for the salary element and a different one for pension - and do I need to contact HMRC or will it happen automatically? My current annual salary is c£53k so going forward will be 50% of that - Pension should be c£25k per annum.

Thanks

dunstonh

 will I have one tax code for the salary element and a different one for pension 

Yes.  you can't have the same one with each.

 - and do I need to contact HMRC or will it happen automatically? 

it will happen automatically.  Pension will be month one code initially and HMRC will advice the pension provider of the tax code to use.  usually before the second payment is made.

Flugelhorn

agree it does happen automatically - you get sent the codes by HMRC and they also contact the people paying you  and it is usually that all the tax allowance goes against one of the payments and the other payment is taxed at BR (base rate) or D0 (higher rate) (though I think you can split the allowances but can't see that it makes any difference in the end )

drummersdale

Thanks @dunstonh I thought it would different - does your tax allowance - mine is 1257 - get split across the pension & salary or are they treated differently for tax purposes. I think what I’m asking in a roundabout way is will i effectively still get an allowance of £12,570 across the 2 forms of “income” so no worse or better off than before?

molerat

They will allocate tax codes to both income streams as necessary.  They should do it automatically but you will be able to check on your tax account. Looks like you will be, if not already, a higher rate tax payer at around £60K this year - pro rata 4 mths at 53K + 8 mths at £26.5K + 8 mths at £25k - so they will have to do some tax code jiggling so you are not too far off correct.  99.99% chance they will get it wrong and will play catch up next year.
edit:  oops can't add up

Notepad_Phil

drummersdale said:

... I think what I’m asking in a roundabout way is will i effectively still get an allowance of £12,570 across the 2 forms of “income” so no worse or better off than before?

Yes, don't worry, you'll still get your allowance of £12,570 across your two income streams - though as molerat says, they may need to play catch up next year.

If it does look like the tax codes are far off then you can call them and they're very easy to talk to:

https://www.gov.uk/government/organisations/hm-revenue-customs/contact/income-tax-enquiries-for-individuals-pensioners-and-employees

jimi_man

Hi. I am in exactly the same position. The problem comes because you’ll be an HR tax payer, so you end up paying too much tax all the time, though it does eventually balance the following year. 

I use all my personal allowance on my pension (on the basis that it will be the case when I give up work). Then on all the earned income I use a BR tax code. Then everything over the HR limit I pay into a SIPP to bring it down to just under. 

Personally I cannot see the point in splitting your personal allowance over the two incomes. 

Every year at SA time, HMRC adjust my tax code to something ridiculous because they don’t understand how the pension payments work and think I’ll be earning too much under a BR code, but it’s easy enough to go onto your HMRC account and adjust it back to normal by artificially reducing your income. 

I find it better to take a proactive approach to it, rather than let HMRC do it as they don’t really like non-standard situations such as this. 

Flugelhorn

jimi_man said:

Personally I cannot see the point in splitting your personal allowance over the two incomes. 

Every year at SA time, HMRC adjust my tax code to something ridiculous because they don’t understand how the pension payments work and think I’ll be earning too much under a BR code, but it’s easy enough to go onto your HMRC account and adjust it back to normal by artificially reducing your income. 

I find it better to take a proactive approach to it, rather than let HMRC do it as they don’t really like non-standard situations such as this. 

Agree don't split it unless it is going to cause you any embarrassment - I had one employer who was sent my coding for D0 saying "but that means you must be earning more than.... " - 

 HMRC do struggle sometimes if it is complex and SA sorts it all out in the end.

drummersdale

Thanks everyone - sounds relatively straightforward so I might simply let HMRC do what they need to do as well as my pension provider (My CSP in my case as a civil servant) and then check on my tax account to see how things are - and simply call them if necessary (Thanks @Notepad_Phil). 

Dazed_and_C0nfused

molerat said:

They will allocate tax codes to both income streams as necessary.  They should do it automatically but you will be able to check on your tax account. Looks like you will be, if not already, a higher rate tax payer at around £60K this year - pro rata 4 mths at 53K + 8 mths at £26.5K + 8 mths at £25k - so they will have to do some tax code jiggling so you are not too far off correct.  99.99% chance they will get it wrong and will play catch up next year.

In this situation, where you wil no longer be a higher rate payer on your salary, HMRC shouldn't allocate a D0 (40%) tax code to your pension.

You should have a BR code (20% at the moment) at the pension and a reduction to your main tax code to reflect the fact that you will be liable to pay some 40% tax across both the job and pension.

If the emergency tax code (1257L) is used on the first pension payment then your main code will be further reduced for the remainder of the current tax year to collect the tax owed as a result of the emergency code being used.  But if the pension payer operates BR from the first payment this won't be an issue.

jimi_man

The OP will be earning £26.5k on salary and £25k pension. (£51.5k). Taking into account pension contributions then he’s unlikely to be a higher rate tax payer going forward. Not quite sure where the £60k for this year is coming from (mentioned above) but he won’t be earning more than he does now. AFAIK you aren’t allowed to do that under Civil Service rules anyway. 

It makes no difference whatsoever financially how the personal allowance is divided up, but it is much easier to have it on your pension and then just pay BR on your salary. As you won’t be an HR taxpayer then there won’t be any further issues and when you eventually do retire then you won’t need to do anything. Splitting it up is just asking for trouble.