Inheritance and income

still_broke

Just to be clear, this is a theoretical question, but one that may be pertinent in the near future.
If I were to receive an inheritance, would that be classed as an income when considered against my employment (ie, will the inheritance affect my tax code)??
I ask as I was told recently that it can reduce your tax code meaning that ALL income from employment becomes taxable (no £12,500 tax free amount).

p00hsticks

No, an inheritance is capital, not income.

Brie

Inheritance is not income and does not attract income tax for that reason.  It does affect people on benefits as it becomes part of their savings and might mean they lose certain benefits as a result if the allowable limits are exceeded.  

I'd be interested to know why someone thought it would change a person's tax code.  Likely told by their friend's cousin's uncle down at the pub late one evening....

still_broke

Brie said:

Inheritance is not income and does not attract income tax for that reason.  It does affect people on benefits as it becomes part of their savings and might mean they lose certain benefits as a result if the allowable limits are exceeded.  

I'd be interested to know why someone thought it would change a person's tax code.  Likely told by their friend's cousin's uncle down at the pub late one evening....

He was actually the accountant at the company I work at, and mentioned that the tax code changes and become 'K' codes (which indicate a lump sum cash payment has been received- usually seen when someone takes a lump sum from a pension or receives an inheritance) and can affect the taxable rates.

Flugelhorn

oh dear  - the accountant hasn't got his facts right

still_broke

Flugelhorn said:

oh dear  - the accountant hasn't got his facts right

I did think it sounded a bit weird, so thought id check with the experts on here.

400ixl

You don't pay inheritance tax, the estate does.

As for a K tax code:

If your tax code has a ‘K’ at the beginning

Tax codes with ‘K’ at the beginning mean you have income that is not being taxed another way and it’s worth more than your tax-free allowance.

For most people, this happens when you’re:

• paying tax you owe from a previous year through your wages or pension
• getting benefits you need to pay tax on - these can be state benefits or company benefits

Your employer or pension provider takes the tax due on the income that has not been taxed from your wages or pension - even if another organisation is paying the untaxed income to you.

Employers and pension providers cannot take more than half your pre-tax wages or pension when using a K tax code.

State benefits that are taxable

The most common benefits that you pay Income Tax on are:

• Bereavement Allowance (previously Widow’s pension)
• Carer’s Allowance or (in Scotland only) Carer Support Payment
• contribution-based Employment and Support Allowance (ESA)
• Incapacity Benefit (from the 29th week you get it)
• Jobseeker’s Allowance (JSA)
• pensions paid by the Industrial Death Benefit scheme
• the State Pension
• Widowed Parent’s Allowance

Tax-free state benefits

The most common state benefits you do not have to pay Income Tax on are:

• Attendance Allowance
• Bereavement support payment
• Child Benefit (income-based - use the Child Benefit tax calculator to see if you’ll have to pay tax)
• Child Tax Credit
• Disability Living Allowance (DLA)
• free TV licence for over-75s
• Guardian’s Allowance
• Housing Benefit
• Income Support - though you may have to pay tax on Income Support if you’re involved in a strike
• income-related Employment and Support Allowance (ESA)
• Industrial Injuries Benefit
• lump-sum bereavement payments
• Maternity Allowance
• Pension Credit
• Personal Independence Payment (PIP)
• Severe Disablement Allowance
• Universal Credit
• War Widow’s Pension
• Winter Fuel Payments and Christmas Bonus
• Working Tax Credit

sheramber

Taking a pension payment is treated differently to receiving an inheritance. 

A company accountant doesn’t necessarily have tax knowledge. It seems your’s  doesn’t.

peteuk

Even if you’re  drawing a pension and a wage, you can decide where the tax is paid from.

I have a monthly pension payment and a monthly wage - I have my pension soak up the 12,570 tax free amount and so I pay 20% on everything I earn.  My tax code is 1257L on my pension and BR (Basic rate) on my wage. 

MEM62

still_broke said:

Brie said:

Inheritance is not income and does not attract income tax for that reason.  It does affect people on benefits as it becomes part of their savings and might mean they lose certain benefits as a result if the allowable limits are exceeded.  

I'd be interested to know why someone thought it would change a person's tax code.  Likely told by their friend's cousin's uncle down at the pub late one evening....

He was actually the accountant at the company I work at, 

He is either outside his area of expertise or needs retaining.