Putting DB pension into payment whilst employed as HR taxpayer

Pat38493

Question for those who know the HMRC / PAYE tax system.

If I was to put my DB pension into payment whilst still employed and paying tax at higher rate (England), what would HMRC do about my tax codes?

I am guessing they would not change the employment tax code but they would put a code on the DB pension that deducts a full 40% of each payment?

What would they then do if my employment income was in the 20% bracket but the DB would push me into the 40% bracket?

Brie

pension payments are income unless they are specified as a tax free lump sum so you would be taxed the same as if you were working for the money.

Pat38493

Brie said:

pension payments are income unless they are specified as a tax free lump sum so you would be taxed the same as if you were working for the money.

Hi Brie - yes I'm fully aware of that, I am just wondering technically how it would be handled in my tax codes. i.e. whether I would pay the full 40% on the DB and still keep the same tax code on my employment earnings.

Brie

Not sure about that as I've never been blessed with that much income!!

squirrelpie

Pat38493 said:

What would they then do if my employment income was in the 20% bracket but the DB would push me into the 40% bracket?

I would suggest you contact HMRC (phone or online or writing?) and tell them which income stream you would prefer to use your allowance and 20% rate and which will be split between 20% and 40% (assuming that is the case). HMRC don't much care and really only want to know which one will be more stable.

molerat

If you are already a 40% tax payer they would give the pension a D0 code to deduct the 40% due on that income. If it is an income that would push you from 20% to 40% they would do some calculations based on total expected income and adjust your main income code to reflect the amount of "underpaid tax" needed to be deducted along with BR on the pension.

Dazed_and_C0nfused

Pat38493 said:

Question for those who know the HMRC / PAYE tax system.

If I was to put my DB pension into payment whilst still employed and paying tax at higher rate (England), what would HMRC do about my tax codes?

I am guessing they would not change the employment tax code but they would put a code on the DB pension that deducts a full 40% of each payment?

What would they then do if my employment income was in the 20% bracket but the DB would push me into the 40% bracket?

No, a D0 (40%) code is only applied if your other source of income are expected to use all of your basic rate band.

So where that doesn't happen it can get a little messy.

You would have a BR (basic rate) code at the pension and your existing code would be revised to include an adjustment (reduction) to take into account you are using some of your basic rate band at the new pension.

As the codes can only ever use estimates of what you will be paid in earnings and pension there is likely to need to be some adjustment needed after the end of the tax year, either a refund due to you or additional tax to be collected in a later tax year.

Keeping HMRC upto speed with accurate estimates of your expected P60 figures can avoid too big a correction being needed.

This refers,
{#Morethanone}More than one coded source: allocating rates

https://www.gov.uk/hmrc-internal-manuals/paye-manual/paye13100

Marcon

Pat38493 said:

Question for those who know the HMRC / PAYE tax system.

If I was to put my DB pension into payment whilst still employed and paying tax at higher rate (England), what would HMRC do about my tax codes?

I am guessing they would not change the employment tax code but they would put a code on the DB pension that deducts a full 40% of each payment?

What would they then do if my employment income was in the 20% bracket but the DB would push me into the 40% bracket?

They'd look at your overall tax position and amend your codes if necessary. You'd end up paying the same amount of tax overall.

Qyburn

Pat38493 said:

What would they then do if my employment income was in the 20% bracket but the DB would push me into the 40% bracket?

A former colleague was in that position, with State Pension and a DB pension as well as employment. He had quite a bit of messing around with underpaid tax to be paid each year. The eventual solution was a SBR code for his DB, and a negative tax code for employment.

Kismet_Hardy

I have been in this position for a number of years now, as I was obliged to take a deferred Teacher's Pension at 60.

My position is even more complex as I have two separate streams of employment income, both on a daily fee paid basis and it is impossible to say, at the beginning of the financial year, exactly how much I'm going to be earning. I have overpaid tax for the last two years and have subsequently received a refund once my tax return has been processed. Another DB pension kicked in this month, and I'm slowing down the amount of work I am doing, just to add further to the complexity.  

Even my accountant agrees that it's best to leave it until the end of the year to sort it all out, although that does mean losing out due to the higher interest rate on savings now.