Partial Retirement and Income Tax

drummersdale

Hi

I wonder if anyone can offer any advice - I took partial retirement in the Civil Service a couple of years ago going down to 18.5 hours a week (2 and a half days effectively) - my salary currently is £28,244 and my pension is £26,774 - my tax codes have always been a mystery to me but I know my current one on my salary is 546LX and BR on my pension.

My forthcoming payrise will take me up to £29,656.

Don’t get me wrong I know I am very lucky to still be working and drawing a pension but am slightly confused about the tax position so my question is would I be any worse off by changing to 2 days a week (so 14.8 hours) - I realise my monthly salary would be less but presumably I would pay less tax and NI as well?

I have multiple tax code changes from HMRC in that time (presumably to offset any underpayments) but I can't profess to understand it other than to assume they know what they are doing.

Thanks for reading.

Dazed_and_C0nfused

drummersdale said:

Hi

I wonder if anyone can offer any advice - I took partial retirement in the Civil Service a couple of years ago going down to 18.5 hours a week (2 and a half days effectively) - my salary currently is £28,244 and my pension is £26,774 - my tax codes have always been a mystery to me but I know my current one on my salary is 546LX and BR on my pension.

My forthcoming payrise will take me up to £29,656.

Don’t get me wrong I know I am very lucky to still be working and drawing a pension but am slightly confused about the tax position so my question is would I be any worse off by changing to 2 days a week (so 14.8 hours) - I realise my monthly salary would be less but presumably I would pay less tax and NI as well?

I have multiple tax code changes from HMRC in that time (presumably to offset any underpayments) but I can't profess to understand it other than to assume they know what they are doing.

Thanks for reading.

Yes.

I'm assuming your current salary quoted is the actual amount, not the FTE.

£28,244 for 18.5 hours is £1,526.70/hour (annually)

£29,656 for 18.5 hours is £1,603.02/hour (annually).

So 14.8 hours on your new salary is £23,725.

Current salary is £28,244 so dropping to 14.8 hours to coincide with the pay rise is going to cost you £4.5k year (gross).  

Your tax position is more complicated than usual because you look to be liable to higher rate tax overall but not on either source of income on their own.  So your tax code will include a deduction to factor in that you need to pay some higher rate tax overall but neither your employer or pension payer can deduct higher rate tax.

The best way to keep on top of that is to ensure HMRC always have as accurate as possible taxable income figures i.e. the amounts you expect to see on your employment P60 and pension P60.

GibbsRule_No3.

D&C will they be liable for higher tax if their PA is taken off? Combined pay and pension does take them above £50,000 but is the PA taken off and then the rest taxed, or am I mistaken?  I assume they are paying into another pension pot and might be a good idea to pay even more in to bring down the tax while working.

Dazed_and_C0nfused

GibbsRule_No3. said:

D&C will they be liable for higher tax if their PA is taken off? Combined pay and pension does take them above £50,000 but is the PA taken off and then the rest taxed, or am I mistaken?  I assume they are paying into another pension pot and might be a good idea to pay even more in to bring down the tax while working.

I've assumed the op is only referring to taxable income i.e. their part time "salary" is maybe say £32k and the £28,244 is after pension contributions (think the op might be in Alpha, a net pay scheme).

But if they are quoting salary before net pay contributions then that would negate a lot of the higher rate tax.

The standard higher rate threshold (excepting Scottish residents) is £50,270.  Made up of the Personal Allowance (£12,570) plus basic rate band (£37,700).

drummersdale

Thanks for the responses - I perhaps have should have added some additional information - the £28,244 is my (current) gross Annual Salary for an 18.5 hour week - I pay 4.6% into my Alpha pension from that salary. I’m not paying into any other pension pot - the £26,774 is from my Classic DB pension. From what I can gather from @Dazed_and_C0nfused original response it does seem I would be a lot worse off if I were to drop to 2 days (14.8 hours a week) - I wondered if the loss of salary might be offset a little by paying less tax and NI but it would seem not. I do try and keep across the details held by HMRC so always endeavour to update them when there is a change in salary or pension - to avoid any nasty surprises in the following year. Thanks again for your responses, most appreciated.

Kind Regards 

Dazed_and_C0nfused

drummersdale said:

Thanks for the responses - I perhaps have should have added some additional information - the £28,244 is my (current) gross Annual Salary for an 18.5 hour week - I pay 4.6% into my Alpha pension from that salary. I’m not paying into any other pension pot - the £26,774 is from my Classic DB pension. From what I can gather from @Dazed_and_C0nfused original response it does seem I would be a lot worse off if I were to drop to 2 days (14.8 hours a week) - I wondered if the loss of salary might be offset a little by paying less tax and NI but it would seem not. I do try and keep across the details held by HMRC so always endeavour to update them when there is a change in salary or pension - to avoid any nasty surprises in the following year. Thanks again for your responses, most appreciated.

Kind Regards 

Have you considered opening a SIPP or personal pension to mitigate the higher rate tax you are currently paying?

Ignoring any future pay or pension rises, you currently have taxable income of £53,719 (£26,945 + £26,774).  So (rounded for simplicity) £3,450 into the higher rate band.

If you contributed £3,450 gross into a SIPP or personal pension you could extinguish the higher rate liability.

That would be £2,760 you pay to the pension company and they would add 25% to that, making a pension fund of £3,450.

That £3,450 increases your basic rate band from £37,700 to £41,150 giving you a personal tax saving of £690.

So the real cost of that £3,450 pension fund is only £2,070.

Obviously you would have to calculate the accurate figures and factor in any other taxable income you have such as untaxed interest but, depending on your personal tax situation, there can be additional tax savings. 

For example you might be able to have a savings nil rate band (aka Personal Savings Allowance) of £1,000 rather than £500 and could be eligible for Marriage Allowance.

Dazed_and_C0nfused

drummersdale said:

Thanks for the responses - I perhaps have should have added some additional information - the £28,244 is my (current) gross Annual Salary for an 18.5 hour week - I pay 4.6% into my Alpha pension from that salary. I’m not paying into any other pension pot - the £26,774 is from my Classic DB pension. From what I can gather from @Dazed_and_C0nfused original response it does seem I would be a lot worse off if I were to drop to 2 days (14.8 hours a week) - I wondered if the loss of salary might be offset a little by paying less tax and NI but it would seem not. I do try and keep across the details held by HMRC so always endeavour to update them when there is a change in salary or pension - to avoid any nasty surprises in the following year. Thanks again for your responses, most appreciated.

Kind Regards 

You would definitely pay less tax and NI as you would have £4.5k less salary.  The tax might be a mix of 20% and 40% and NI 2% and 8%.

But you might have somewhere in the region of £250/month less take home pay.

And a smaller salary means less Alpha pension is being accrued for when you retire for good.

At the end of the day only you know if that ~£250 (and loss of a little bit of future pension) is worth having to work (some of) that extra day?

drummersdale

Thanks very much @Dazed_and_C0nfused that’s really helpful advice and given me food for thought, I appreciate you taking the time to respond.

Kind Regards