Confusing tax codes 11 January at 4:49PM in Pensions, annuities & retirement planning 5 replies 284 views

LarryR

My dad recently passed away and I am just helping my mum sort out her finances. It's quite straightforward, and yet, strangely, still complicated?!? (Or it's probably just me).

My mum is 76years old, is registered disabled and has been for the last 20 years. My dad was in his 80s when he died at the end of last year and was retired.

Looking through bank statements, it seems that income-wise, my dad had 3 pensions - state (around £865pm) + 2 workplace pensions (£450pm + £88pm). My mum has 4 income streams - state pension (around £703pm), workplace pension (£218pm), an annuity (£80pm), and disability living allowance (£627pm). There's also a couple of savings accounts, but they pay minimal interest (few hundred a year).

I have informed DWP about my dad's passing, as well as the two work pension schemes. My mum's state pension looks like it has 'inherited' 80% of my dad's state pension, so has been increased by about £95pw (sounds less than 80% to me, but it all helps?!). My dad's two work pension schemes have yet to get back to us about what changes, if any, they'll make?

The question is about a letter my mum received from HMRC explaining how her tax code has been calculated for 2022-23, which arrived just last week. It says she owes £201 in tax for the year, however, she has previously never paid/owed any tax? Is this all due to my dad dying?

It explains how they have worked out the tax codes by saying she has a a personal allowance of £12,570. Less State Pension of £10,484 it says and less 'Adjustments for estimated tax you owe (this year)" £1539. Not sure what that's relating to. So, it says, 'Total tax-free amount' is £547.

It further goes on to explain how 'Your total tax-free amount is used' ... for the workplace pension it says '£353 is added to this income' and 'K34 X replaces 252L'. It goes on that the 'Prudential UK Pensions' (which I think is the annuity), '£900 of this income is tax-free' and has a tax code of 90T.

It finishes off by saying 'This totals your tax-free amount' £547 and says 'Estimated tax you owe (this year)' is £201.00.

So, not really sure what these numbers mean? Does she now owe tax because she has inherited part of my dad's state pension? And that has tipped her over the personal allowance?

Any clues would be gratefully accepted.

Thanks




 

Marcon

LarryR said:

My dad recently passed away and I am just helping my mum sort out her finances. It's quite straightforward, and yet, strangely, still complicated?!? (Or it's probably just me).

My mum is 76years old, is registered disabled and has been for the last 20 years. My dad was in his 80s when he died at the end of last year and was retired.

Looking through bank statements, it seems that income-wise, my dad had 3 pensions - state (around £865pm) + 2 workplace pensions (£450pm + £88pm). My mum has 4 income streams - state pension (around £703pm), workplace pension (£218pm), an annuity (£80pm), and disability living allowance (£627pm). There's also a couple of savings accounts, but they pay minimal interest (few hundred a year).

I have informed DWP about my dad's passing, as well as the two work pension schemes. My mum's state pension looks like it has 'inherited' 80% of my dad's state pension, so has been increased by about £95pw (sounds less than 80% to me, but it all helps?!). My dad's two work pension schemes have yet to get back to us about what changes, if any, they'll make?

The question is about a letter my mum received from HMRC explaining how her tax code has been calculated for 2022-23, which arrived just last week. It says she owes £201 in tax for the year, however, she has previously never paid/owed any tax? Is this all due to my dad dying?

It explains how they have worked out the tax codes by saying she has a a personal allowance of £12,570. Less State Pension of £10,484 it says and less 'Adjustments for estimated tax you owe (this year)" £1539. Not sure what that's relating to. So, it says, 'Total tax-free amount' is £547.

It further goes on to explain how 'Your total tax-free amount is used' ... for the workplace pension it says '£353 is added to this income' and 'K34 X replaces 252L'. It goes on that the 'Prudential UK Pensions' (which I think is the annuity), '£900 of this income is tax-free' and has a tax code of 90T.

It finishes off by saying 'This totals your tax-free amount' £547 and says 'Estimated tax you owe (this year)' is £201.00.

So, not really sure what these numbers mean? Does she now owe tax because she has inherited part of my dad's state pension? And that has tipped her over the personal allowance?

Any clues would be gratefully accepted.

Thanks




 

DLA isn't taxable, so taking that out of the equation, she has an income of £12,012 (based on 12 x your monthly state pension/workplace pension/annuity figures above) + minimal interest.

You don't say exactly when your dad died, but if she has inherited a further £95 a week as a result, that's going to take her over the personal allowance of £12,570 by the end of the current tax year. She would only need another £558 between now and 5 April, so a further £95 a week would tip her into taxable territory within 6 weeks of being payable to her.

If HMRC estimates she will owe £201 in tax, that means they are expecting her to exceed the personal allowance by around £1,000 - i.e. her total income for the tax year will be about £13,570. 

zagfles

OK, firstly forget DLA, as that's not taxable.

The state pension is taxable, but tax is never applied to it directly.

So tax needs to be taken from the workplace pension and/or annuity which she has tax codes for.

Before your dad died it looks like her taxable income was under the tax threshold, around £12k.

Now it's gone up by the extra state pension, sounds like approx £95 times about 16 weeks? (ie from when your Dad died until the end of this tax year)? So maybe around £1500 extra?

So her income over the tax year will be about £13500, so tax due on about £1000, so about £200 tax due. Very approx.

The way HMRC usually do things where a change like this occurs is rather than just reduce the tax code, which would result in a one-off back payment, they give a non cumulative tax code (ie one with an X or M1 at the end), so the tax payable is spread over the rest of the year. The way this is calculated and tax free amounts etc are basically a fiddle to get the right end result (or so it's hoped!).

So that probably explains it so far - but if your Dad's workplace pensions have a spouse benefit as most do, then she'll have 2 more income streams which will cause even more complication - I'd guess they'd be allocated BR tax code (ie fully taxable at 20%, as no spare personal allowance).

LarryR

Thanks for your replies - that all makes sense now. It's annoying how you pay no tax when you pay into a pension (when you can probably most afford to pay tax), but pay tax when you receive your pension (when you can probably least afford to pay tax!) - seems backwards?! 

zagfles

LarryR said:

Thanks for your replies - that all makes sense now. It's annoying how you pay no tax when you pay into a pension (when you can probably most afford to pay tax), but pay tax when you receive your pension (when you can probably least afford to pay tax!) - seems backwards?! 

But the advantage is that a lot of people don't pay tax in retirement anyway, or not much, because most/all of their pension income is in the personal allowance. And if people didn't get tax relief they'd probably pay less into their pension in the first place. Plus a lot of people will be in a lower tax band in retirement, so it's generally better this way.

Consumer3

LarryR, 

Regarding the State Pension she inherited, have a good read of the long document that should have come with the calculation. 
Having recently gone through this with my MIL, she inherited 100% of my FIL’s Additional State Pension not whole State Pension. It’s all to do with when he was born. 

On or before 5 Oct 1937, 100%
6 Oct 1937 to 5 Oct 1939, 90%
And so on until,

On or after 6 July 1950, 50%

I believe it’s only for those couples that retired before 2016 but not sure what happens if one partner retired after then.

As a tip, I found that reading the documents out loud, especially if you’re reading it for someone else, meant we took it in more.