Tax on two small DB pensions

Qyburn

Hi,

The missus has started receiving a DB pension after stopping work, so the pension is her only income at the moment. For some reason it's paid as if it was two separate pensions, so each month she'll receive one payment of just under £200 and one just over £200 for a total of just over £400 per month.  It seems to me self evident that this should not incur any tax, unless there was an underpayment carried over from her employment.  HMRC do not see it this way, in a long conversation the lady was insistent that one of those two will be taxed at basic rate as an unavoidable consequence of having received employment income earlier in the tax year.  The best that she could suggest was to issue what she calls a cumulative tax code for the smaller amount, and a Basic Rate code for the larger amount.

It seems silly collecting tax that a quick calculation (or even just common sense) says will need to be claimed back.

Is there something different we could have asked for, for example if asked would the put them both onto Month One for the rest of this tax year?

I have no idea whether the same will still apply next year, or whether they can split the personal allowance between the two, giving say one a tax code of 628 and one 629.  She said that next year's coding isn't on their system yet so she couldn't comment. I guess it will be another bag of worms the following year when her State Pension starts.

The sums of money are relatively small, but I would much rather avoid all the hassle of a tax return each year to sort it out.

Dazed_and_C0nfused

What happens this tax year (with a previous employment?) won't necessarily be the same as future (pre State Pension) years.

From April 2023 she should have a main tax code of say 1017L and a second one of 240T.

HMRC will only allocate the allowances actually needed to a second job/pension.

Qyburn

Cheers.  I understand for this year that they can only carry forward the year to date figures to one following employment or pension.  I just cannot understand the logic indicating that the second pension by definition is liable for basic rate tax. And why that way round, why is the larger one liable for tax while the smaller one gets the tax code?

Parking_Trouble

Worth registering to check her income and income tax online if you haven't already. It gives a clearer picture of what's going on and what the forecast income is. 

I have two DB pensions in payment, plus I drawdown from a SIPP.  My aim is always to keep under the higher rate tax threshold.

A couple of years ago a helpful person at HMRC split the personal tax allowance across the two DB pensions.
On the smaller one - only £1334 pa they give me £1334 allowance, 133L so no tax paid.
The remainder of the allowance is on the larger DB pension. 1123T
The SIPP income has BR tax code so all income is taxed at basic rate.

You can adjust the forecast income for each income stream. That evens out any bumps.
Have they assumed the employment income is coming in all through the tax year?

Not sure that solves your problem but if she is going to be below the personal allowance and not paying tax then I can't see why they can't give the DB pensions some of the allowance to stop the tax being taken.

Qyburn

Thanks, we'll have a look online to see if there are more options. In think the lady quite clearly understood that no more salary had been received since December, and that the only income from then is the £400 odd per month.

Clearly I was over optimistic in expecting them to realise that £400 a month is never going to incur tax. With hindsight I should have been prepared to spell it out by taking the P45 figures for income and tax to date, adding on three months of pension and calculating the total tax due for the whole tax year. That's clearer than working in part year month 10 or month 11 figures.

I guess it's possible that they were not actually insisting that tax was due, maybe what they meant was they have no way of not taking it, even though they know she'll be paying too much.

I'm not quite sure on her comment about tax return, she said that couldn't be done as she's "below the threshold". We'll cross that one when we come to it, I've had HMRC trying to discourage me in the past when I knew I was due a tax refund. In that case I just went ahead and submitted the return, and received the refund as a result.

Pat38493

Just to be clear here, you haven't said how much she earned up to December - are you saying that even with her earned income up to December, she won't exceed the personal allowance in the whole tax year?

Qyburn

No she was earning enough to be paying tax during those 9 months. Am I oversimplifying? I was making the assumption that she had been taxed correctly for those 9 months, and on that basis no tax should be due on the 3 x £400 odd final three months. I know it's actually done on cumulative figuresm but the effect should be as if her employment should have use 9/12s of the personal allowance leaving 3/12 (over £3000) still unused.

I will do the full year calculation.

sammyjammy

Qyburn said:

No she was earning enough to be paying tax during those 9 months. Am I oversimplifying? I was making the assumption that she had been taxed correctly for those 9 months, and on that basis no tax should be due on the 3 x £400 odd final three months. I know it's actually done on cumulative figuresm but the effect should be as if her employment should have use 9/12s of the personal allowance leaving 3/12 (over £3000) still unused.

I will do the full year calculation.

You are correct but they won't just take her word for it that the pension income is all that she will have until the end of the tax year and so yes she will pay tax on the pension income and a refund will be calculated post end of tax year.  She won't have the issue with her state pension as the tax codes will just be adjusted to account for that income (tax isn't paid directly on state pension, they just adjust your coding)

Pat38493

sammyjammy said:

Qyburn said:

No she was earning enough to be paying tax during those 9 months. Am I oversimplifying? I was making the assumption that she had been taxed correctly for those 9 months, and on that basis no tax should be due on the 3 x £400 odd final three months. I know it's actually done on cumulative figuresm but the effect should be as if her employment should have use 9/12s of the personal allowance leaving 3/12 (over £3000) still unused.

I will do the full year calculation.

You are correct but they won't just take her word for it that the pension income is all that she will have until the end of the tax year and so yes she will pay tax on the pension income and a refund will be calculated post end of tax year.  She won't have the issue with her state pension as the tax codes will just be adjusted to account for that income (tax isn't paid directly on state pension, they just adjust your coding)

There was a whole thread about a similar situation a few weeks ago - in theory if HMRC give her correctly adjusted cumulative tax codes, it should even out by the end of the year - however - this late in the tax year they will probably claim that it's too late to adjust it properly.

Qyburn

Qyburn said:

I will do the full year calculation.

Which works out, if she pays no tax on her pension income she would end the year having overpaid tax by just over £420. Some of that comes from using the whole personal allowance as I said, some from paying more 19% tax and less 21%.

I think she'll get some of that corrected in the pension with the cumulative tax code, but have it taken back again via the other. I am not sure whether that will end up better or worse than if both had been treated on a month one basis to the end of the year.

Pat38493

Qyburn said:

Qyburn said:

I will do the full year calculation.

Which works out, if she pays no tax on her pension income she would end the year having overpaid tax by just over £420. Some of that comes from using the whole personal allowance as I said, some from paying more 19% tax and less 21%.

I think she'll get some of that corrected in the pension with the cumulative tax code, but have it taken back again via the other. I am not sure whether that will end up better or worse than if both had been treated on a month one basis to the end of the year.

From what I understood on the other thread, if they have set the other tax code (not the BR one) correctly according to what happened up to that point, she would automatically get a tax refund (if due) in the final payment of the year through PAYE on that particular DB pot.