Calculating HMRC Tax on Multiple Sources of Income (ie. Pensions, Savings, Dividends)

HUMBUG

 HMRC seem to have changed my Tax code on my 'Company Pension'  in November 23  from 1055L to 1108L  for a strange reason , which has bamboozled me. They say the following:
"Your Untaxed Interest On Savings and Investments has been reduced from £2011 to £1490"

But my untaxed interest on Savings and Investments will probable be greater for year 2024/25 so I thought I'd better check whether I am being undertaxed or not.

I find the HMRC tax terminology very difficult to understand for some reason, so is my logic below correct:

Current Situation (6th April 2023- 5th April 2024)

Company Pension = £10560 pa
Interest On Savings = £6639
Share Dividend = £1871

Unused Personal Income Tax Allowance = £12570 - 10560 = £2010
Interest On Savings - £5000 Savings Starting Rate- £1000 Personal Savings Allowance =  
£6639 - £5000-£1000 = £639 

I am now assuming that HMRC offset that £639 taxable savings income against my  'Unused Personal Income Tax Allowance' , therefore it will be reduced to : £2010 -£639 = £1371

Dividend - Dividend Allowance (£1000 for year 23/24)  = £1871 -£1000 = £871

I am assuming that the £871 taxable dividend income is offset against  my 'Unused Personal Income Tax Allowance', therefore it will be reduce to : £1371 - £871 = £500

Therefore because I have £500  'Unused Personal Income Tax Allowance'  , there is no tax for me to pay for year 2023/2024.

Have I got this correct?

Future Situation (6th April 2024 - 5th April 2025) - Tax Code 1108L

Company Pension will increase by 5% = £11088  (Hmmm- is this why they changed my tax code to 1108L so that I don't have to pay tax at source?) 

Company Pension £11088
State Pension (I will be 66 in Oct) so income from Oct 24 -5th April 25 = £4780
Interest On Savings estimated = £7645
Share Dividend estimated = £1871  

Company Pension + State Pension = £11088 + £4781 = £15869
My 'Wage' income has gone over the £12570  Personal Income Tax Allowance by :
£15869 - 12570 = £3299
Therefore I will lose £1 'Starting Savings Rate' for every £1 over and above my Personal Income Tax Allowance of £12570.
Starting Savings Rate = £5000 - £3299 =  £1701
Personal Savings Allowance = £1000
Therefore taxable Interest On my savings will be:  £7645 - £1701 - £1000 = £4944

I am therefore assuming HMRC will reduce my personal tax allowance from 12570 to:
£12570 - £4944 = £7626
But if my State Pension Is taxed at 20% because of tax code 1108L already applied to my company pension, this will mean:
£4780 x 20% = £956 income tax already taken . 

Therefore my personal tax allowance will need to increase to : £7626 + £956 = £8582 and I suppose will be used as my tax code for year 25/26  to recover all the income tax I owe for year 24/25.

Dividend - Dividend Allowance (£500) =  £1871 - £500 = £1371 which will be taxed at 8.75% = £1371 x 8.75% = £120

I am assuming that I will have to submit a one-off payment to HMRC for the £120 tax on share dividends because I do not have any unused personal tax allowance to offset the £1371 against.

Have I got this correct?

[Deleted User]

A very long post but the salient point is that HMRC will reduce your code to reflect the state pension when you start to receive it as they will be notified shortly beforehand. The code will operate on a M1 basis so that income prior to the change is unaffected. That’s how it works!

There is no mechanism to tax the state pension directly. 

HUMBUG

[Deleted User] said:

A very long post but the salient point is that HMRC will reduce your code to reflect the state pension when you start to receive it as they will be notified shortly beforehand. The code will operate on a M1 basis so that income prior to the change is unaffected. That’s how it works!

There is no mechanism to tax the state pension directly. 

Can you please explain what M1 basis means?  Does this also mean that my State Pension will not be taxed at all from Oct 24?  That they will amend my Tax code in year 25/26 as necessary to recover my unpaid tax?

[Deleted User]

Your code will be 1108L from April right through to September. 

From October you will get the state pension which you say will be around £10800 per annum, based on 4780 for 23 weeks. Your code will be reduced by 1080 to 28L  but placed on a Month 1 basis so that each subsequent payroll will have the correct amount of tax deducted but not affect payments prior to October. A month 1 code taxes payments by reference only to that month.

So in October you will be taxed on 1/12 of your annual company pension plus 1/12 of your annual state pension and receive 1/12 of your personal allowance. This will continue for the remainder of the tax year.

There should, therefore, be no underpayment and the M1 will be removed from your code come April 2025. 

Dazed_and_C0nfused

HUMBUG said:

[Deleted User] said:

A very long post but the salient point is that HMRC will reduce your code to reflect the state pension when you start to receive it as they will be notified shortly beforehand. The code will operate on a M1 basis so that income prior to the change is unaffected. That’s how it works!

There is no mechanism to tax the state pension directly. 

Can you please explain what M1 basis means?  Does this also mean that my State Pension will not be taxed at all from Oct 24?  That they will amend my Tax code in year 25/26 as necessary to recover my unpaid tax?

Your State Pension is never taxed.

Your tax code will be amended shortly after you reach State Pension age to factor in your State Pension and you will pay extra tax on your company pension.

HMRC usually use the full annual amount in the first year you receive State Pension but tell your company pension to use the new tax code on a non cumulative basis (often known as M1 or week1/month 1 basis).