Pensioner Taxation

pterri

Ironically many pensioners would be delighted that their income was high enough to be in the higher rate bracket. Mine will be (assuming everything moves with inflation) when I’m 67. Not claiming either yet but comfortable with paying my dues, if not thrilled. Someone has to pay for services and like it or not, demographic trends are not looking great for an aging population and fewer young wage earners. 

I may do the state a favour and take up skateboarding at 80. 

Silvertabby

Dazed_and_C0nfused said:

HappyHarry said:

Dazed_and_C0nfused said:

HappyHarry said:

If the OP were to donate their state pension income to a registered charity then they could avoid a lot of the angst and reduce their tax liability.

It wouldn't though.

As a basic rate payer the charity would be able to claim the basic rate tax credit but the op would not save any personal income tax.

They would also have a nice warm glow from inside, which might help make up for the loss of the Winter Fuel Allowance!

The OP is complaining that they are paying higher rate tax on some of their income due to the state pension. Can they not claim back the difference between higher rate and basic rate on their contributions - for the bit that falls in to the higher rate tax bracket at least?

If they are liable to higher rate tax then yes, Gift Aid donations would save them some tax.

But the op's second post on this thread started with the comment below so it's still not clear if they are actually a higher rate payer or not.

I have a total pension of £39,000 and part of my £39,000 is being taxed at 40%.

I read that as £39K in total, including the State pension.

The problem we have here is the very common one of not understanding how taxation post SPA works.  Yes, OP seems to realise that the State pension is classed as taxable income, but then makes the mistake of viewing the (highest?) occupational/private pension in isolation, hence the belief that it is being taxed at a higher rate.

In my own case, looking at my main (RAF) pension in isolation, I'm paying well over 30% tax on the whole amount - but that's only because my RAF pension tax code has been reduced in order to account for the 20% tax due from my State pension.  Add everything together, including my LGPS BR pension, take off my standard tax allowance, and my (max 20%) tax is spot on.

Not the first time this 'issue' has been raised, and I'm sure it won't be the last.

Grumpy_chap

Retired2015 said:

I have a total pension of £39,000 and part of my £39,000 is being taxed at 40%.
If you are under pension age you will not be taxed until you exceed £50,270.
Because I am a pensioner, I am now being taxed at 40% when I exceed £37,570 (£50,270-12,570)
That seems unfair to me.

If some of your private pension is being taxed at 40% because of the SP, why not forfeit the SP?

Is your private pension DC or DB?
How have you drawn any lump sums?

Mutton_Geoff

Retired2015 said:

I have a total pension of £39,000 and part of my £39,000 is being taxed at 40%.
If you are under pension age you will not be taxed until you exceed £50,270.
Because I am a pensioner, I am now being taxed at 40% when I exceed £37,570 (£50,270-12,570)
That seems unfair to me.

Tax rates are nothing to do with being "pension age" or not, they are based on your income at any stage of life. You haven't said how much state pension you are receiving but if your other pension is paying £39,000 then as others pointed out, you will be paying higher rate tax (40%) on anything more than £11,270 from the state pension or any other source of income.

It may be you are assuming the state pension is a tax free right rather than a taxable benefit?

Moving into the higher rate tax band also reduces your personal savings (interest) allowance from £1,000 to £500.

Retired2015

It is obvious from your kind comment, that am not making myself clear.

To help clarify my points, I suggest you try the following and you will see exactly how I am being taxed 40% on £39k:

1. Go to the GOV.UK PAYE Tax Calculator (sorry but I can't post links)
2. Enter details as if you were currently working and under state pension age, on an income of £39k per year
3. Restart afresh and enter the same details, but say YES to being over state pension, then enter tax code 38L (Personal Allowance is deducted because it is assumed you are receiving the state pension).

As a pensioner, I loose my Personal Allowance, which I have no problem with paying tax on my state pension.
What I and many others (it seems) do not appreciate is my Personal Allowance is utilised AGAIN as a mechanism to reduce my 40% tax threshold from £50,270 to £37,570 ((£50,270-12,570).

It is the double use of the Personal Allowance that I was not aware of and do not feel is fair. I've no idea when this was implemented, but it is not made clear by HMRC. It is NOT mentioned in the GOV.UK Income Tax rates and Personal Allowances. It would be nice to have mentioned it there! I cannot find anything about it anywhere other than when using the PAYE Tax Calculator.

The majority of on-line calculators DO NOT take state pension age into account. Payslips only show a total amount of tax, so you do not know when you start paying 40%.

This is even more important when pensioner's decide to withdraw lump sums from their pensions (excluding the 25% tax free allowance). If they assume their 40% threshold is £50,270, they may have a real shock when HMRC come asking for 40% tax on anything over £37,570.

I hope this makes my concerns a bit clearer and thanks for your input and patience.

Grumpy_chap

Your HR threshold is still at £50,270 and this does mean HR tax on pension on above £37,570 if the SP is also considered.

Rather than online calculators, why not just look at total income and total tax liability:

Income:

• State Pension £12,570
• Private Pension £39,000
• Total = £51,570

(OP may need to add to the above any other sources of income, for example savings interest or dividends received.)

Income Tax:

• Personal Allowance £12,570
• Basic Rate Band £37,700 @ 20% = £7,540
• Higher Rate Band on £51,570 - £37,700 - £12,570 = £1,300 @ 40% = £520
• Total Income Tax = £8,060

The tax code on the private pension will be adjusted to account for the SP using the personal allowance so all the tax is collected from that portion of income and the SP is then paid without tax deducted.

I assume there is some simplification of the figures the OP has quoted above as it would be a coincidence (though entirely possible) if the OP's SP exactly equalled the OP's Personal Allowance.

The other consideration in the above is how the OP has drawn any lump sums from the pension, which may have been tax free, or whether the OP is drawing 25% tax free on all draw down as time progresses.  This would impact the tax calculation.

Ayr_Rage

@Retired2015 you ARE NOT losing (one o) your personal allowance, your state pension is paid without deduction of tax so that takes up some of the personal allowance.

The amount of the pension is then deducted from the personal allowance tax code and whatever code is left determines when tax starts to be paid.

In every post you are forgetting that you get your state pension completely free from tax.

You are not being discriminated against or being penalised in any way. 

MK62

Are you saying you receive £39000 from private/workplace pensions and £12190 from state pension/other income? (for a total of £51190)?
OR, 
Are you saying you receive £39000 from private/workplace pensions and are NOT yet in receipt of any state pension?
OR, 
Are you saying you are in receipt of £26810 from private/workplace pensions, and £12190 from state pension/other income? (for a total of £39000)

PS - £12190, as if your tax code is 38L, then HMRC believes you are in receipt of state pension/other income of £12190 (or have deductions from previous years)......since £12570-12190=380.

molerat

Retired2015 said:

It is obvious from your kind comment, that am not making myself clear.

You are making it very clear that you do not understand that you are not being double taxed.    

Your personal allowance is not being lost, it is being used up by your untaxed but taxable state pension income.  

40% tax commences at £37700 above your personal allowance.  Your personal allowance is £12570 of which £12190 is already used up by your state pension leaving £380 so you commence paying 40% above £38080 of your other income.  £38080 + £12190 = £50270 total income before 40% tax commences, so over £37700 above your £12570 personal allowance.

Stubod

Sorry but I don't understand this?? Just typed in your figures and got:-

Over SP age:-

Gross income £39,000.00
Personal Allowance £12,570.00

Taxable Income £26,430.00 Income 

Tax at 20% £5,284.20

National Insurance £0.00

Take-home pay £33,715.80

Under SP age

Gross income £39,000.00

Personal Allowance £12,570.00

Taxable Income £26,430.00
Income Tax at 20% £5,284.20

National Insurance £2,114.40
Take-home pay £31,601.40

But I assume if yiou are taking your state pension then this adds (approx), £11,500 to your income which gives:-

Over SP:-

Gross income £50,502.00

Personal Allowance£12,570.00

Taxable Income £37,932.00

Income Tax at 20% £7,540

Income Tax at 40% £89.20

National Insurance £0.00 

Take-home pay £42,872.80

Under SP:-

Gross income £50,502.00

Personal Allowance £12,570

Taxable Income £37,932.00

Income Tax at 20%£7,540

Income Tax at 40% £89

National Insurance £3,020

Take-home pay £39,852.16

I assume if you use the tax code it assumes you are taking the SP, and just adds that figure to your income??