Taxation of State Pension

blue.peter

I currently have two private pensions:

Company A, substantial DB pension, tax code 1257L, payable at the end of each month;

Company B, smaller annuity from DC funds, tax code BR, payable on the 9th of each month.

I will reach SPA in late November, and intend to draw my state pension then. I plan to make my claim for it in late August (i.e., as early as possible). The first payment won't be made until December. I know that it's taxable but paid untaxed. Tax will therefore be collected on it by reducing my Company A tax code.

The amount of my state pension will be around £219/week, or £11,388/year. Even with all three pensions in payment, I won't be a higher rate taxpayer, so the Company B annuity code should - I hope - remain as BR. For 2025-26 (ignoring any increase in either the state pension or the personal allowance), then, my Company A tax code will reduce to 1257 - 1139 = 118L or thereabouts.

Questions:

1. Do I need to tell HMRC when I claim my state pension, or will they pick it up automatically from DWP?

2. When will HMRC reduce my tax code for 2024-25? September? November? December? Some other time? (There won't be enough time after I make my claim for any change to take effect in August.)

3. I think that I should receive about £3,800 in state pension in 2024-25. Am I right in thinking that my Company A tax code should become something like 877L (i.e., 1257 - 380) when it does change?

4. I had to ask HMRC to apply the whole of my personal allowance to the Company A pension instead of splitting it pro-rata between the two private pensions. Will they automatically continue this arrangement when they reduce the tax code, or will they revert to their default of splitting it?

Silvertabby

In theory, you don't need to do anything, as HMRC will pick this up automatically.  Eventually.

But I didn't like the idea of running up substantial arrears, so I rang them as soon as my State pension kicked in.  Perhaps I was lucky, but I got through to a very helpful lady who sorted out my coding while I was still on the 'phone - tax allowance against my RAF pension reduced to account for the tax due from my State pension, and LGPS kept as BR.

Dazed_and_C0nfused

1.  No

2.  During December.  Never before you reach SPA.

3.  No, as an existing taxpayer your code will be reduced by the full annual amount of State Pension.  But the new code will be operated on a non cumulative basis.

4.  Given the large State Pension deduction I think that is highly unlikely.

Blue_Butterfly

I reached SPA in November 2023 and didn't get a bigger tax deduction from my NHS pension until December. This was done automatically without me contacting HMRC. It seemed to be about the right amount.

I got my invitation letter in July, dated exactly 4 calendar months before my birthday and arriving a few days later. My friends received their award letters about a week after applying, mine took 6 weeks as I was a widow inheriting ASP.

GibbsRule_No3.

My excess PA is taken from my current employment with my two Private Pensions(PP) being given the BR code. I assumed the excess would be paid on my largest PP when I give up work. Not that there is much ££ between the two £314.

blue.peter

Thank you all for your helpful comments. Much appreciated. I now have a better idea of what to expect, which is what I wanted.

Dazed_and_C0nfused

blue.peter said:

Thank you all for your helpful comments. Much appreciated. I now have a better idea of what to expect, which is what I wanted.

It's a very simplistic example but you might find the example of "Wes" worth a read in this guide.

https://www.litrg.org.uk/pensions/state-pension/tax-state-pension/how-tax-collected-state-pension#3

blue.peter

Dazed_and_C0nfused said:

It's a very simplistic example but you might find the example of "Wes" worth a read in this guide.

Very clear, thanks. I'd worked out that it must be an "M1" code from what you said earlier. That seems to me to be a really weird way of doing it, and would have completely thrown me if I hadn't expected it. I assume that I'll then revert to a cumulative basis in April 2025.

Dazed_and_C0nfused

blue.peter said:

Dazed_and_C0nfused said:

It's a very simplistic example but you might find the example of "Wes" worth a read in this guide.

Very clear, thanks. I'd worked out that it must be an "M1" code from what you said earlier. That seems to me to be a really weird way of doing it, and would have completely thrown me if I hadn't expected it. I assume that I'll then revert to a cumulative basis in April 2025.

Correct.  The way things are going with the triple lock and frozen Personal Allowance you can expect to end up on a K* code on a year or two!

*where your tax code deductions are greater than your tax code allowances so instead of getting a small amount of earnings or pension with no tax deducted your employer/pension payer adds an amount to your earnings/pension before working out the tax.

blue.peter

Dazed_and_C0nfused said:

Correct.  The way things are going with the triple lock and frozen Personal Allowance you can expect to end up on a K* code on a year or two!

*where your tax code deductions are greater than your tax code allowances so instead of getting a small amount of earnings or pension with no tax deducted your employer/pension payer adds an amount to your earnings/pension before working out the tax.

Yes, I'd been thinking that a K code was a possibility in the future. (As it happens, I do know about those, thanks. I'm my mother's attorney, and she has one. My sister, who used to run a payroll, tells me that she always hated them!)

I'm not sure how politically acceptable it would be to have state pensions exceeding the personal allowance, though. I hope that future Chancellors would find it too unpalatable.

EDIT: Having state pensions exceeding the personal allowance presents a practical difficulty for HMRC and hence the Treasury. Suppose, in a few years' time, someone has a state pension of £14,000 and no other income whilst the personal allowance has stuck at £12,570. That state pension is taxable, but paid without deduction of income tax. How will the tax due be collected? We'll have people who are not well off required to complete tax returns and pay money directly to HMRC. That would not be popular.

Grumpy_chap

blue.peter said:

I'm not sure how politically acceptable it would be to have state pensions exceeding the personal allowance, though. I hope that future Chancellors would find it too unpalatable.

Everything can be looked at from different sides.

One other side of looking at that might be that the SP is generously paying such that income tax becomes liable.

Another side of looking at that might be to cap the SP at the standard personal allowance.

I am sure there are more sides to look from also.

I am not saying I favour any particular side, simply that there are several perspectives on the same thing.