Pension and Income tax

3card

Not sure if this needs to be on the pensions forum or an income tax forum

2 years ago i was made redundant and with a small portfolio of BTL properties I decided to start taking a small pension from my SIPP.
I decided to take £1000 per month to keep me below my tax threshold (The income from the properties is in my wife's name)

I am now in a position that i need to take a little more of my pension for a few months (3 to 4 months) but i am unsure how this will affect me income tax for the rest of the tax year.

As i say i am taking £1000 per month now and i am looking at increasing this to £1600 for 3 or 4 months which i know will take me to a level of paying income tax but i am unsure how much?
My current personal allowance is £12570 but am unsure if i will only pay the income tax for the months i receive the extra payment

My pension advisors say i will only pay tax in the months i receive the extra and once i go back down to the £1000 per month i will stop paying tax

Can anyone advise if this is correct??

dunstonh

As i say i am taking £1000 per month now and i am looking at increasing this to £1600 for 3 or 4 months which i know will take me to a level of paying income tax but i am unsure how much?

Are you drawing the income as 75% taxable and 25% tax free or only the 25% or only the 75% elements?

Taxation is based on your annual income over the tax year.  Not months in isolation.  So, you need to add up the total over the tax year.

My pension advisors say i will only pay tax in the months i receive the extra and once i go back down to the £1000 per month i will stop paying tax

Can anyone advise if this is correct??

They have more info than us on how you draw your income but generically, that would appear to be right in respect of the 75% taxable element.  Depending on when it is is in the tax year, you may actually be taxed too much in the months you have increased and get some back in the months after you reduce back.

3card

dunstonh said:

As i say i am taking £1000 per month now and i am looking at increasing this to £1600 for 3 or 4 months which i know will take me to a level of paying income tax but i am unsure how much?

Are you drawing the income as 75% taxable and 25% tax free or only the 25% or only the 75% elements?

Taxation is based on your annual income over the tax year.  Not months in isolation.  So, you need to add up the total over the tax year.

My pension advisors say i will only pay tax in the months i receive the extra and once i go back down to the £1000 per month i will stop paying tax

Can anyone advise if this is correct??

They have more info than us on how you draw your income but generically, that would appear to be right in respect of the 75% taxable element.  Depending on when it is is in the tax year, you may actually be taxed too much in the months you have increased and get some back in the months after you reduce back.

Thanks for taking to time to read and reply

I used the 25% tax free element from my pension to actually buy one of the properties so there is no tax free payment from my pension

Dazed_and_C0nfused

You will pay tax as soon as your average monthly income (from the pension) exceeds £1048.

When you return to £1,000/month you will start getting some of the tax already paid back.  Assuming it's later in the same tax year.

QrizB

3card said:

I decided to take £1000 per month to keep me below my tax threshold (The income from the properties is in my wife's name)

I'm sure you have a good reason for doing this but (depending on the bigger picture) your joint tax bill might be less if the property income was shared betweeen you.

Dazed_and_C0nfused

As an example,

Month 1 pension £1,000 = £12,000 annual income = average £1,000/month

So no tax payable on 1257L tax code

Month 2 pension £1,000 = £2,000 after 2 months = £12,000 annual income = average £1,000/month
So no tax payable on 1257L tax code

Month 3 pension £1,600 = £3,600 after 3 months = £14,400 annual income = average £1,200/month

So c£91 tax payable on 1257L tax code

Month 4 pension £1,600 = £5,200 after 4 months = £15,600 annual income = average £1,300/month

So c£201 tax payable (in total) on 1257L tax code

Month 5 pension £1,000 = £6,200 after 5 months = £14,880 annual income = £1,240/month

So c£192 tax payable (in total) on 1257L tax code.  Meaning the £1,000 will be paid in full + the pension company wil refund £9 of the tax previously deducted.

And so on.

3card

Dazed_and_C0nfused said:

As an example,

Month 1 pension £1,000 = £12,000 annual income = average £1,000/month

So no tax payable on 1257L tax code

Month 2 pension £1,000 = £2,000 after 2 months = £12,000 annual income = average £1,000/month
So no tax payable on 1257L tax code

Month 3 pension £1,600 = £3,600 after 3 months = £14,400 annual income = average £1,200/month

So c£91 tax payable on 1257L tax code

Month 4 pension £1,600 = £5,200 after 4 months = £15,600 annual income = average £1,300/month

So c£201 tax payable (in total) on 1257L tax code

Month 5 pension £1,000 = £6,200 after 5 months = £14,880 annual income = £1,240/month

So c£192 tax payable (in total) on 1257L tax code.  Meaning the £1,000 will be paid in full + the pension company wil refund £9 of the tax previously deducted.

And so on.

Thanks very much for that very clear explanation.
After i posted i realised that my personal allowance is better than i thought because i am also in receipt of the marriage allowance which i believe changes my PA to £13830 which will help

Dazed_and_C0nfused

3card said:

Dazed_and_C0nfused said:

As an example,

Month 1 pension £1,000 = £12,000 annual income = average £1,000/month

So no tax payable on 1257L tax code

Month 2 pension £1,000 = £2,000 after 2 months = £12,000 annual income = average £1,000/month
So no tax payable on 1257L tax code

Month 3 pension £1,600 = £3,600 after 3 months = £14,400 annual income = average £1,200/month

So c£91 tax payable on 1257L tax code

Month 4 pension £1,600 = £5,200 after 4 months = £15,600 annual income = average £1,300/month

So c£201 tax payable (in total) on 1257L tax code

Month 5 pension £1,000 = £6,200 after 5 months = £14,880 annual income = £1,240/month

So c£192 tax payable (in total) on 1257L tax code.  Meaning the £1,000 will be paid in full + the pension company wil refund £9 of the tax previously deducted.

And so on.

Thanks very much for that very clear explanation.
After i posted i realised that my personal allowance is better than i thought because i am also in receipt of the marriage allowance which i believe changes my PA to £13830 which will help

No-one, not even recipients of Marriage Allowance, can have a Personal Allowance greater than £12,570.

You are presumably referring to your tax code allowances, a totally different thing.

But irrespective of that if your tax code is 1383L/M/N/T then the £1,048/month becomes £1153/month.  At least as far as what happens during the tax year is concerned.

3card

QrizB said:

3card said:

I decided to take £1000 per month to keep me below my tax threshold (The income from the properties is in my wife's name)

I'm sure you have a good reason for doing this but (depending on the bigger picture) your joint tax bill might be less if the property income was shared betweeen you.

Thanks for your reply

How would this work? If i use my full allowance surely i cant use any more of my allowance?

QrizB

3card said:

QrizB said:

3card said:

I decided to take £1000 per month to keep me below my tax threshold (The income from the properties is in my wife's name)

I'm sure you have a good reason for doing this but (depending on the bigger picture) your joint tax bill might be less if the property income was shared betweeen you.

Thanks for your reply
How would this work? If i use my full allowance surely i cant use any more of my allowance?

I don't know exactly what you and your wife put on your tax returns (and I don't want to know) but, as an example, there's the Property Allowance:

The property allowance is a tax exemption of up to £1,000 a year for individuals with income from land or property.

If you own a property jointly with others, you’re each eligible for the £1,000 allowance against your share of the gross rental income.

If you own the property jointly, you each get an allowance.

Dazed_and_C0nfused

Although the property allowance is an alternative to claiming expenses.  So not of benefit for everyone with rental income.