Tax - If I partially retire mid year will I have to pay more tax?

drummersdale

Hi - I am taking partial retirement starting this August (next month even!) - my Tax Code is 1257L - apologies for the stupid question but is that allowance of £12,570 split across the whole of the tax year so the impact on tax will be smoothed out across the year both in my salary and what will be by pension from August?  Or will I end up paying more during the last few months?

Thanks

Marcon

Your personal allowance is just over £1,047 a month. If you are already earning above the personal allowance (i.e. you've used it up for the first few months of the current tax year), and your partial retirement increases your taxable income, you'll pay more tax as your income increases because you will still only have £1,047 a month which isn't subject to tax.

molerat

Tax is smoothed across the year but there may be some hiccups along the way when moving to multiple income streams.  HMRC usually manage to correct it after the first pension payment, a lot depends on the tax band you fall into and amount from each income whether they get it right or not.

drummersdale

Thanks @Marcon & @molerat

german_keeper

When I went partially retired in 2019 I just carried on with my full tax allowance allocated to my wages and paid BR on my pension. Been doing that ever since, although there was one year when for some reason I underpaid a bit. It was just coded out the following year and when I checked P60s it was all correct.

Mind you mine was very simple, earning above PTA both pre and post early retirement and nowhere near 40% bracket. I have recently retired but on leave till 1st August. I am not drawing down my Partnership pension till next April so I should get most of the tax paid on earnings from April to July back. Whether that goes as smoothly only time will tell. But if I have to wait till next year for a rebate so be it. 

drummersdale

Thanks @german_keeper I'll just keep an eye on the first few pension and salary slips and can always give HMRC a call if anything looks out of kilter

Somebody

If it's income from a DB pension keep an eye out on your gov.uk tax account. It will list the pension and the allocated tax code before the first payment; mine did anyway. YMMV.

Marcon

Somebody said:

If it's income from a DB pension keep an eye out on your gov.uk tax account. It will list the pension and the allocated tax code before the first payment; mine did anyway. YMMV.

OP - don't worry if it doesn't. It's a timing issue - not all schemes will provide HMRC with the relevant information in time for a code to be allocated before the first payment of your pension - so nothing to worry about/no action needed from you unless the  situation persists for more than a couple of months. 

Dazed_and_C0nfused

I don't think any schemes are likely to provide HMRC with the information before the first payment as it all has to be filed under the Real Time Information system so nothing is sent to HMRC until the first payment.

Then HMRC will review the tax code position and issue updated tax code is need be.

jimi_man

german_keeper said:

When I went partially retired in 2019 I just carried on with my full tax allowance allocated to my wages and paid BR on my pension. Been doing that ever since, although there was one year when for some reason I underpaid a bit. It was just coded out the following year and when I checked P60s it was all correct.

Mind you mine was very simple, earning above PTA both pre and post early retirement and nowhere near 40% bracket. I have recently retired but on leave till 1st August. I am not drawing down my Partnership pension till next April so I should get most of the tax paid on earnings from April to July back. Whether that goes as smoothly only time will tell. But if I have to wait till next year for a rebate so be it. 

I do it the other way round - tax code on my pension and BR on everything else. My reasoning was that the pension will be a constant for the rest of my life so better to have the tax code on that. Overall it makes little difference and you don't pay any more either way, it's just slightly less admin doing it this way.

german_keeper

jimi_man said:

german_keeper said:

When I went partially retired in 2019 I just carried on with my full tax allowance allocated to my wages and paid BR on my pension. Been doing that ever since, although there was one year when for some reason I underpaid a bit. It was just coded out the following year and when I checked P60s it was all correct.

Mind you mine was very simple, earning above PTA both pre and post early retirement and nowhere near 40% bracket. I have recently retired but on leave till 1st August. I am not drawing down my Partnership pension till next April so I should get most of the tax paid on earnings from April to July back. Whether that goes as smoothly only time will tell. But if I have to wait till next year for a rebate so be it. 

I do it the other way round - tax code on my pension and BR on everything else. My reasoning was that the pension will be a constant for the rest of my life so better to have the tax code on that. Overall it makes little difference and you don't pay any more either way, it's just slightly less admin doing it this way.

I didn't actually choose anything, it was just done that way. I suppose it made sense because my earnings were above PTA, pension below. I will have earned just shy of £7k this year when they finally stop paying me on 1st August and we will then get by on savings, tax rebate and wife's earnings till I start my drawdown next April. Oh, and by sheer good fortune I fixed the gas and leccy for 2 years in September 21 so any lump sums HMG are going to throw at us to pay the bills will also go in the pot!

So presumably the tax code allocated to my pension will reflect this situation when HMRC send themselves my P45. And I presume I could take some sort of action on my personal tax account if needed. But no panic, it will be sorted out somehow and we won't starve.

Not sure what will happen next year with tax codes. I will be paying some tax but both my income sources will be below PTA. I probably should know all this being an ex HMRC employee but I wasn't on the taxes side of things.