Personal Allowance/Adjustment to Rate Band Query

Moots2024

I retired on 31st July 2024 having essentially been in the same job for the whole of my career. In retirement I will however receive pension from two sources as a result of a company merger that took place a few years ago.

On retirement as well as tax free lump sums I took a one off taxable lump sum of £15,145.04. I appreciate there were other options for this money but it did make sense to take it and in any event what's done is done so no advice needed please on whether or not I should have done what I did.

The pensions I expect to receive are £29,693p.a. and £7077p.a. Total : £36,770p.a.

Gross taxable income expected in 2024/2025 :- 

Salary(April-July) : £17,995
Taxable Lump Sum : £15,187
Pension(August-March) : £24,488 
TOTAL : £57,670

I had a company car so there is a relatively small benefit from that to take into account for April-July. Chargeable interest from savings is negligible. Most of my savings are tied up in ISAs and Premium Bonds. 

The lump sum takes me into the 40% income tax band for this year. But assuming the bands more or less remain the same that will only be for this year. I will not be taking any further lump sums from pension funds in the future.

My August payslip from the pension fund paying me the lump sum included a deduction for income tax in excess of £6,200. I am familiar with the way income tax is charged and that I will have been charged to the full extent in respect of income in that month that was in excess of a monthly proportion the 40% band. I understand I may want to try and claim any excess tax paid now I think by completing from P55 rather than waiting for any correction to be made by HMRC at the end of the tax year.

On the one hand the HMRC website includes a PAYE income tax estimate for me which it sets out a Total Estimated Income close to the total I have set out above but I have not been able to trace how HMRC arrived at its figure. It may just be coincidentally similar to mine. The Income Tax Estimate makes allowance for receiving tax free income of £12,617. Bizarrely slightly more than the current Personal Allowance. This may be to allow for minor expenses I incurred to enable me to work from home. 

However, on the other hand, a separate page sets out that my annual tax free amount will only be £3,510 making an adjustment of £2,368 in respect of the company car and also an adjustment in the sum of £6,692 in respect of "Adjustment to Rate Band"(ARB).

I have done some reading on what an "ARB" is and I think understand it as far as it provides for the whole of an Annual Allowance to be allocated to one source of income (in my case the payer of the larger of my two pensions). I have also read that altering Tax Free Allowance is a mechanism for making sure I am charged the correct tax over the course of the year.

Is it not double counting if I am charged for the taxable lump sum as income but then also have my Personal Allowance reduced? I don't understand. Is anybody able to help me please? In any event the adjustment appears excessive.

I am minded to amend figures on the HMRC website which elsewhere appear to be wrong and also to submit a P55. Does that sound appropriate?

I have read some material which suggests that PA reductions are something which kick in only in respect of income in excess of £100k. 

Moots2024

Is anybody able to help please?

sheramber

The people on this site are volunteers who have day  jobs and other responsibilities to deal with before logging on here. 

Moots2024

Thanks. Noted and appreciated. Just noticed my query had been looked at 27 times and there appeared to have been a lot of activity and comments on other matters. 

Dazed_and_C0nfused

You have misunderstood some things, one in particular being the difference between your Personal Allowance (£11,310 or £12,570 unless tapering applies) and your tax code allowances.

An adjustment to rate band tax code deduction is usually applicable when you are liable to higher rate tax overall but not on your main* source of income, for example you have a job paying £40k and a pension paying £20k.

You should also remember that tax codes are only ever provisional, the final position will be checked once the tax year ends, either by HMRC reviewing things or you submitting a tax return (if you meet the criteria to submit one).

The one off pension payment would normally have been taxed using the emergency tax code (1257L) so there would have been a mix of no tax, 20%, 40% and 45% deducted from a monthly payment of ~£15k.

Even if you were to make an in tax year refund claim it's quite likely that with so many different things to consider some adjustment will be needed once the tax year is reviewed, either an additional refund or tax you owe.  For example your ex employer has until July 2025 to file the P11D providing confirmation of the actual Car Benefit arising for 2024-25.

*main isn't necessarily the biggest in £ terms, it's whichever one HMRC see as your main source, often the one that occurred first.

Moots2024

Thanks. I'm sorry if I was unclear. I do understand that there is a Personal Allowance and tax code allowances which are effectively set off against those allowances - frankly not set out by HMRC in a particularly clear way. What is concerning is that because of the way income tax is calculated it is likely that I will have paid excessive income tax which I will not recoup (and without interest) for around 8 months. There is some encouragement given on this website to make an in tax year claim, where that might have been the case, rather than wait until the end of the tax year(or perhaps beyond) - https://www.moneysavingexpert.com/reclaim/overpaid-pension-tax/

However on reflection, and having managed eventually(!) to speak with someone from HMRC this evening, I am minded as you advise to wait until the end of the tax year for things to settle down but I shall be keeping a close eye on the tax I am charged and to try and make sense of it.

Thank you for your assistance.

You mentioned I had misunderstood "some things" which is concerning. What else have I got wrong? It is confusing to the layman. 

Thanks again.

Dazed_and_C0nfused

Moots2024 said:

Thanks. I'm sorry if I was unclear. I do understand that there is a Personal Allowance and tax code allowances which are effectively set off against those allowances - frankly not set out by HMRC in a particularly clear way. What is concerning is that because of the way income tax is calculated it is likely that I will have paid excessive income tax which I will not recoup (and without interest) for around 8 months. There is some encouragement given on this website to make an in tax year claim, where that might have been the case, rather than wait until the end of the tax year(or perhaps beyond) - https://www.moneysavingexpert.com/reclaim/overpaid-pension-tax/

However on reflection, and having managed eventually(!) to speak with someone from HMRC this evening, I am minded as you advise to wait until the end of the tax year for things to settle down but I shall be keeping a close eye on the tax I am charged and to try and make sense of it.

Thank you for your assistance.

You mentioned I had misunderstood "some things" which is concerning. What else have I got wrong? It is confusing to the layman. 

Thanks again.

Nothing to be too concerned about but as well as your Personal Allowance not being reduced the tapering of the Personal Allowance isn't based on your "income", it's adjusted net income which is relevant for this.

Which for most people is their total taxable income (including any interest or dividends taxed at 0%) less any relief at source pension contributions and Gift Aid donations.

Not really sure why it's bizarre for your tax code allowances to be increased by any work related expenses claims you have made?  It would be odder if HMRC had ignored such a claim and not included them in the make up of your tax code.

Have you considered making some additional pension contributions in the current tax year?

Unless you have made large pension contributions in this tax year you could probably eliminate all the higher rate liability.

With taxable earnings/pension income of say £58,270 (estimated company car benefit included) you are going to be liable to higher rate tax on ~£8k.

For example a £4k (net) RAS contribution will give you a pension fund of £5k and increase your basic rate band by £5k, moving £5k from the 40% band to basic rate band.  A personal tax saving of £1k.

So your £5k pension fund only really costs you £3k.  And if you wait until a future tax year before taking it out you will get £4,250 back after basic rate tax.  Something to consider.

Moots2024

Brill. Thank you.