Paying tax if earning less than tax allowance?!

lindos90

Both myself and OH decided to take our pensions early at 56 in September this year. We have both received new tax codes as they now need to be split between our employment and pension (I'm carrying on working a few hours a week, OH is tutoring someone 1.5 hours a week)

They have split my tax code which seems illogical to me, as it means that I will now start to pay tax, even though I earn less than my tax code 🤷‍♀️

Just using rounded/approximate figures..

I earn around £4k a year (variable) and my pension is about £3k (will go up a bit each year, but is more of a fixed amount)

The letter I got today has allocated 9k to my employment, and 1.5k to my pension. (My husband will keep the 10% tax allowance from me as he still 'earns' more than me overall)

This means I will pay tax on half of my pension, while £5k of my allowance is being unused for my employment income.

I guess (hope) in April they will recalculate it and give me a refund, but we have budgeted monthly expecting that I would continue to not pay any tax due to my level of income overall.

The complicated part is also that I will be expecting to earn over £1000 a year in interest, which I thought would be fine as I would get the additional £4k allowance on interest as a none tax payer. But now they have split my tax allowance like this it does make me a tax payer 🤦‍♀️

Frustratingly this is compounded by what they have done with my husband's tax code. He was sent a tax refund of around £450, but within a week of that he got a letter from IR reducing his tax allowance by £4000 until next April as they estimate he will not have paid enough tax by then (approx £400 underpayment) how has he been given a refund if he is underpaying? 

This means, as the main earner, he will be bringing in much less money than we anticipated, as more of it will be taxed. 

We have looked on the gov site and are none the wiser as to how this all makes any sense. He did adjust his figures that they had approximated, to be more accurate, (and hopefully more favourable) and that reduced his code even more by another £1000 🤦‍♀️ his allowance is now more or less halved to approx 7k, whereas before it was just over 13k.

How can this be right? Incidentally OH code was reduced just after he got a letter saying it wouldn't be recalculated until April next year 🤷‍♀️

Devongardener

You can contact HMRC to request a different split of your tax code between earnings and pension to get it allocated correctly.

It’s difficult to comment on your husband’s situation, without seeing the HMRC calculations, if you are willing to share them, redacting any personal details. 

Does the £4000 code adjustment relate to an underpayment from a previous year?

sheramber

Do HMRC  know you have cut your hours and your employment income will be less.

If you have not told them they will not know.

Albermarle

As above you need to contact HMRC. If you phone them then best to do it as soon as their lines open at 08.00.


I guess (hope) in April they will recalculate it and give me a refund,
Normally it is October before this will happen. Best to get it sorted now, or otherwise it will happen every year.

No need to worry about savings interest, because there is also a £5000 per year savings starter rate.
Tax-free savings: check if you're eligible - Money Saving Expert

lindos90

Devongardener said:

You can contact HMRC to request a different split of your tax code between earnings and pension to get it allocated correctly.

It’s difficult to comment on your husband’s situation, without seeing the HMRC calculations, if you are willing to share them, redacting any personal details. 

Does the £4000 code adjustment relate to an underpayment from a previous year?

It's great new to know I can ask them to split the tax code more efficiently, that may solve a lot of problems. In effect my overall income is increasing now I have drawn my pension, but at £7k (4k income, 3k pension) I'm still way under my tax allowance. I've not earnt enough to pay tax for many years.

I'll check all his figures and come back with those (or maybe suggest he joins and does it on a nes thread) 

His tax code has always been pretty straightforward tbh, only really changing when the basic allowances have been increased for everyone. He was salaried before he retired, and didn't do overtime or have a secondary income that might have messed around with the figures or payments, so his income over the year was predictable, no under or overpayments that needed adjusting.

That's probably why we are having a hard time working it out, because it had always coasted along and been correct, until he retired and effectively took a pay cut.

lindos90

sheramber said:

Do HMRC  know you have cut your hours and your employment income will be less.

If you have not told them they will not know.

I've not changed my hours at work. I've just taken my differed pension from a previous employer. In effect my overall income is increasing now, but at £7k (4k income, 3k pension) I'm still way under my tax allowance. I've not earnt enough to pay tax for many years.
They have not reduced my tax allowance/code at all, but split it between my wage and my pension in such a way that I will pay tax. 

lindos90

Albermarle said:

As above you need to contact HMRC. If you phone them then best to do it as soon as their lines open at 08.00.


I guess (hope) in April they will recalculate it and give me a refund,
Normally it is October before this will happen. Best to get it sorted now, or otherwise it will happen every year.

No need to worry about savings interest, because there is also a £5000 per year savings starter rate.
Tax-free savings: check if you're eligible - Money Saving Expert

Thanks for the info, I think both of us need to call them up 🤦‍♀️.

Oh heck, we both can't be paying too much tax for a year, our budget is pretty slim as it is. We definitely need to ask them to look at it now if they will.

I thought the savings starter rate (the additional £4k) was only applicable to non tax payers though? 

Dazed_and_C0nfused

lindos90 said:

Albermarle said:

As above you need to contact HMRC. If you phone them then best to do it as soon as their lines open at 08.00.


I guess (hope) in April they will recalculate it and give me a refund,
Normally it is October before this will happen. Best to get it sorted now, or otherwise it will happen every year.

No need to worry about savings interest, because there is also a £5000 per year savings starter rate.
Tax-free savings: check if you're eligible - Money Saving Expert

Thanks for the info, I think both of us need to call them up 🤦‍♀️.

Oh heck, we both can't be paying too much tax for a year, our budget is pretty slim as it is. We definitely need to ask them to look at it now if they will.

I thought the savings starter rate (the additional £4k) was only applicable to non tax payers though? 

No, it's an additional £5k and it gets reduced pound for pound if your non savings non dividend income uses up the basic rate band.

So someone paying basic rate tax on say £10k of employment income will lose all their savings starter rate band.  Someone paying basic rate tax on £1,500 will still have £3,500 to use.

lindos90

Dazed_and_C0nfused said:

No, it's an additional £5k and it gets reduced pound for pound if your non savings non dividend income uses up the basic rate band.

So someone paying basic rate tax on say £10k of employment income will lose all their savings starter rate band.  Someone paying basic rate tax on £1,500 will still have £3,500 to use.

Sorry, I think it's my inexperience i'm not explaining myself very well, I'm thinking that there's an interest allowance for everyone of £1k (unless a higher tax rate bracket where its only £500, I think..but who should be so lucky haha!) so I understood there was an additional starter savings rate, so £5k interest in all being available, depending on income.
Maybe I need to go back and have another look. Thank you for your advice, and thanks for reading my very long opening post! Couldnt sleep for worrying last night and wrote it in the early hours.

Dazed_and_C0nfused

lindos90 said:

Dazed_and_C0nfused said:

No, it's an additional £5k and it gets reduced pound for pound if your non savings non dividend income uses up the basic rate band.

So someone paying basic rate tax on say £10k of employment income will lose all their savings starter rate band.  Someone paying basic rate tax on £1,500 will still have £3,500 to use.

Sorry, I think it's my inexperience i'm not explaining myself very well, I'm thinking that there's an interest allowance for everyone of £1k (unless a higher tax rate bracket where its only £500, I think..but who should be so lucky haha!) so I understood there was an additional starter savings rate, so £5k interest in all being available, depending on income.
Maybe I need to go back and have another look. Thank you for your advice, and thanks for reading my very long opening post! Couldnt sleep for worrying last night and wrote it in the early hours.

Once the Personal Allowance has been used there is the (up to) £5,000 savings starter rate band.  Although not everyone will be able to use this.

After that the savings nil rate band can be used (up to £1,000 interest taxed at 0%)

Albermarle

So as an example if you earned £8K .
Then you will use up £8K of your £12570 personal allowance, leaving £4570 .
If you earned £4570 in savings interest this would use this up.
Then you could earn another £5K of interest on top of that, and then when that was used up you could earn another £1000 tax free.
So if your earned income was £8K, you could earn in total £10,570 in interest without paying any tax on it ( assuming no other taxable income from other sources)