Quick question on tax...

chubsta

still trying to get my head around exact income following retirement.
Example (figures are 'made up' but just need to know how stuff is worked out):

Salary £40,000
Pension per year will be £20000

So, if I retired on the very last day of the financial year my income for the following year would be:
20,000
personal tax allowance 12500
income after tax of 20% on 7500 = 18500, gives me a monthly income of £1541.
Is that correct? Seems simple enough to be correct!

However, lets say I didn't retire until 2 months in, in which case I would have earned, and paid tax/NI etc on £6666.
How does this affect what I will be getting for the rest of the year - as I would have used up half of my yearly tax allowance does that mean I would be paying more tax out of my pension?

NedS

It's simple really - you add up your taxable income for the year, be that from employment or from a pension. You deduct your personal allowance (standard rate is £12,570) and you pay tax at 20% on everything above the personal allowance (assuming you are a basic rate tax payer).

If you retire part way through the year, your PAYE tax should just resolve itself - just like if you moved jobs part way through the year from a job paying £40k to a job paying £20k per year. Your pension will be paid through the pension scheme administrators PAYE system, and after the first month, once they have a tax code for you from HMRC, any treatment of tax should sort itself out through the PAYE system. If you do find yourself in a situation at the end of the tax year having paid too much tax, you can apply for a refund, or just wait and HMRC should automatically issue a refund. This could happen, for example, if you retired towards the end of the tax year and received a single payment for March from your pension provider before they had your tax code etc.

sheramber

You get 1/12 of your personal; allowance each month so you have not used up half the allowance for the two months. You have only used up 2 months worth - 2 x 1/12 = 1/6.

You have 10 months allowance left to cover the next 10 months.

molerat

If you are a basic rate tax payer in your employment and you make a clean transition to the pension, you are only paid by one of them in a month, your net pension monthly will still be £1541 as you receive 1/12th of you annual allowance per month and pay 20% tax on anything above that amount.  The only thing that would alter that is if you were paid by both sources in one month or if you were a higher rate tax payer in the employment, but as mentioned above the PAYE system will seamlessly work it out.

Albermarle

 or if you were a higher rate tax payer in the employment, but as mentioned above the PAYE system will seamlessly work it out.

I was a higher rate taxpayer in 21/22 for 3 months, then a couple of months gap, then a much lower pension income for the rest of the tax year.
Tax calculation for 21/22 was due in October 22. Still waiting....
I guess I will have to phone them at 08.00 one day .

chubsta

sheramber said:

You get 1/12 of your personal; allowance each month so you have not used up half the allowance for the two months. You have only used up 2 months worth - 2 x 1/12 = 1/6.

You have 10 months allowance left to cover the next 10 months.

That is kind of what I was hoping for as an answer, so will go with that.
For some reason I was getting a little confused and didn't figure out for myself that if I had indeed used up 6666 of my personal allowance in those first two months then of course I wouldn't have paid tax on it, if that makes sense!

Thanks for all the replies, seems like it should tally with my pension calculations per month.