Pensioner Incomes being Taxed at 50% - K Code Issues

[Deleted User]

In April 2015 the Marriage Allowance was introduced.

In the March 2021 Budget, the Chancellor of the Exchequer said that income tax Personal Allowance was to be frozen until April 2026. In the Autumn Statement 2022 the Chancellor stated the freeze was to be extended a further two years to April 2028.

By way of an example: an individual in April 2015 used the Marriage Allowance of £1260 to increase the tax-free allowance of their partner, a basic rate taxpayer, allowing them to pay less tax. Everything works fine with the individual paying no tax because their income falls within their tax-free allowance.

The individual’s income comes from the basic state pension and two small private pensions paying £500 each per year. The freeze on personal allowance essentially begins during tax 2020-2021 when it is set at 12,500.

In tax year 2021-2022 the personal allowance increases to 12,570 the first start year of the freeze. The individual continues to pay no tax; however, their tax-free allowance is much reduced because their pensions have increased.

By tax year 2023-2024 the individual’s income is such that there is no tax-free allowance, it has gone negative by £1000 causing one of the smaller pensions to be given a K tax code. The individual is now paying 50% or £250 tax on £500 of pension income.

For the current tax year 2024-2025 the negative amount has increased to £2000 meaning that the smaller pension cannot pay an income making the taxman come after the other smaller pension reducing what it will be paying.

There are political issues which are essentially cancelling the marriage allowance for those in most need of it. People earning over £125,140 per year are taxed at 45% whilst the individual’s income totalling £14,000 will be taxed in part at 50%.

Are you a victim of fiscal and political incompetence. Your thoughts please.

Hoenir

[Deleted User] said:

Are you a victim of fiscal and political incompetence. Your thoughts please.

It's how the tax system has worked for a very long time. When there's different income streams to be considered. Pointless making this a political debate. 

[Deleted User]

‘By tax year 2023-2024 the individual’s income is such that there is no tax-free allowance’

Bit misleading - the tax free allowance does exist but has been utilised against the state pension. Perhaps better to say ‘no tax-free allowance remaining’

Bookworm105

add all your income together and then tax it before claiming you pay tax at 50% 

p00hsticks

 WattNext said:

Your thoughts please.

Clickbait thread title and some rather disingenuous remarks in the text -
Yes, Some income has 50% tax deducted, but that's to account for the fact that a far larger chunk of taxable income has not been taxed at source. 
As Bookwork105 says - add up all your taxable income and the tax you pay and then tell us what % tax you are actually paying.   . 
  

Dazed_and_C0nfused

People earning over £125,140 per year are taxed at 45% whilst the individual’s income totalling £14,000 will be taxed in part at 50%.

Someone with taxable income of £14,000 would be paying a maximum of £538 in tax.  Which is less than 4%.

Plenty wil be paying £0.  Or 0%.

[Deleted User]

Dazed_and_C0nfused said:

People earning over £125,140 per year are taxed at 45% whilst the individual’s income totalling £14,000 will be taxed in part at 50%.

Someone with taxable income of £14,000 would be paying a maximum of £538 in tax.  Which is less than 4%.

Plenty wil be paying £0.  Or 0%.

I was, perhaps, a little generous in my reply. On reflection, the op is promoting the false premise that someone on £14000 could be a 50% taxpayer. I won’t ever recover the  time it took to reply. 

molerat

It is amazing how many people have a poor understanding of a) the tax system and, even worse, b) basic maths.

Grumpy_chap

The individual whose income has now lifted out of the personal allowance can decide to no longer continue with the Marriage Allowance transfer to their spouse.

[Deleted User]

Hoenir said:

[Deleted User] said:

Are you a victim of fiscal and political incompetence. Your thoughts please.

It's how the tax system has worked for a very long time. When there's different income streams to be considered. Pointless making this a political debate. 

Indeed! By now April, pensioners or others on very low incomes should have received their form P2 from HMRC. One needs to look at the tax codes set against pension(s) to see whether a K code has been assigned. Do this for previous years too.

They should also have received their P60's from their pension provider(s) on which is stated the gross pension before tax and the tax deducted. If a K code has been assigned to a provider, then look at the tax paid and work out the percentage. Look back through P60's and observe when the K code first appeared and observe before this the lowering of the tax code as a result of pension increases. In the OP example there are two pensions: one has a K code paying tax at a 50% rate and the other has a basic rate code BR paying tax at 20%.

One can request to have the marriage allowance removed by way of mitigation thereby increasing partner tax. HMRC are not allowed to say how one may reduce their tax burden so will not offer this advice. With the freeze in personal allowances continuing for some years to come, rises in pension earnings may cause negative allowances and K codes to reappear. The first warning of this will come from form P2 usually issued in January for the upcoming tax year.

The evidential fact being seen is that some low-income pensioners are paying tax at both 50% and 20% on earnings that should really attract a single rate of 20% on earnings for the whole tax year.

In Parliament Budgets become money bills and are given scrutiny by all politicians before becoming a Finance Act. Is this unintended consequence, the inappropriate use of K codes, one that got past everybody including the ever-vigilant finance media?

molerat

They should also have received their P60's from their pension provider(s)

Providers have until the end of May to supply the P60

The evidential fact being seen is that some low-income pensioners are paying tax at both 50% .....

There is no 50% tax rate.  Some may be paying 50% of a particular pension in tax but that will be because it is tax due from elsewhere.

K codes are used where other untaxed income exceeds the personal allowance and should, in most cases, result in the correct amount of due tax being collected. The 50% limit may in fact result in too little tax being collected. What other method of collecting the tax due do you suggest ? I suspect there would be mass panic when a simple assessment dropped on the doormat asking for £££££ by January.

Just goes full circle back to my previous post

It is amazing how many people have a poor understanding of a) the tax system and, even worse, b) basic maths.