Pensioner Taxation

horsewithnoname · 3 October 2024 at 10:42AM

JoeCrystal said:

Retired2015 said:

Can anyone explain the rationale behind this please?
And when was this introduced?
To my mind, pensioners are being penalised unfairly.

Nope, it sounds like you are under the impression that you are penalised. You are taxed precisely like any other people who have taxable incomes. Clearly, you did not fully understand the tax rules.

horsewithnoname said:

When it was introduced? I think PAYE was introduced to pay for the Napoleonic wars? State pensions were some time later, but it’s certainly been a fair old while.

Sorry to nitpick. Income taxes are introduced to pay for the Napoleonic wars. But don't worry, it is only temporary! PAYE, on the other hand, was due to WW2 after a massive increase in the number of taxpayers, and wisely, they decided to make it as easy as possible for their employers to pay taxes. The PAYE system works well for someone on weekly or monthly pay.

Thanks, at least the Napoleonic Wars came into it somehow, so I’m not addled yet 😂

HappyHarry · 3 October 2024 at 11:02AM

Retired2015 said:

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.

OK - sorry OP but I think you might have misunderstood. You are not losing your personal allowance twice.

Have another look at the online calculator and your tax coding. The tax coding of 38L only applies to your private pension income - it does not apply to your state pension income.

i.e. If your total income including your state pension is £39,000 then the tax code you should use on the online calculator is 1257L.

If your total income without your state pension is £39,000 then the tax code you should use is 38L - but you should then add your state pension to the net income shown.

In your situation, of your total taxable income - which includes your state pension;

The first £12,570 is taxed at 0% (personal allowance)
The next £37,700 is taxed at 20% (basic rate tax)
Income above that up until £125,140 is taxed at 40% (higher rate tax)
Income above £125,140 is taxed at 45%

The above is true regardless of if you are being paid the state pension or not.

Retired2015 · 3 October 2024 at 3:50PM

Grumpy_chap said:

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.

My income is £39000 INCLUDING STATE PENSION

molerat · 3 October 2024 at 3:59PM

Retired2015 said:

My income is £39000 INCLUDING STATE PENSION

So what makes you think you are paying 40% tax ?

If your SP is £12190 and you have a code of 38 set against an income of £26090 then you will not not paying any 40% tax, you will be taxed at 20% on £25710 of that income. You are getting £12190 SP + £380 of your other pension tax free, a total of £12570, that remaining £25710 comes nowhere near to paying 40%.

Retired2015 · 3 October 2024 at 4:03PM

Retired2015 said:

Grumpy_chap said:

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.

My income is £39000 INCLUDING STATE PENSION

and I am paying 40% tax, as per the UStubod said:

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??

Stubod said:

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??

This is the GOV.UK Tax Calculator using:
£39000 income (including State Pension)
Yes I'm Retired
38L Tax Code

Output from GOV.UK Tax Calculator

How we calculated this

Gross income

£39,000.00

Personal Allowance

£380.00

Taxable Income

£38,620.00

Income Tax at 20%

£7,540.00

Income Tax at 40%

£364.40

National Insurance

£0.00

Take-home pay

£31,095.60

I also rang HMRC and they confirmed I am paying 40% tax on earnings of £39000 p.a. (made up of State Pension £12,208.00 and Private pension £26882.70).

HappyHarry · 3 October 2024 at 4:04PM

Retired2015 said:

Grumpy_chap said:

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.

My income is £39000 INCLUDING STATE PENSION

Ah - then the 38L tax code is only applied to the part of your earnings that isn't state pension. Your state pension is being paid tax free - so it is unlikely that you are paying any higher rate tax at all!

Happy days

Grumpy_chap · 3 October 2024 at 4:05PM

Retired2015 said:

Grumpy_chap said:

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.

My income is £39000 INCLUDING STATE PENSION

Thank you, I think that was unclear and other posters had asked for the same to be clarified.

So, you have:

Income:

State Pension £12,190 (£12,570 - £380 based upon the 38L tax code you advised)
Private Pension £26,810
Total = £39,000

(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
So, all of the SP is received @ 0%
£380 of the private pension is received at 0%
Basic Rate Band £37,700 so the balance (£26,810 - £380 = £26,430 ) of the private pension is @ 20% = £5,286
Total Income Tax = £5,286

Is that the actual tax you are having deducted?
Rely on actual figures rather than online calculators.

HappyHarry · 3 October 2024 at 4:10PM

Retired2015 said:

I also rang HMRC and they confirmed I am paying 40% tax on earnings of £39000 p.a. (made up of State Pension £12,208.00 and Private pension £26882.70).

No - there is some confusion. On everything you have said you are not paying 40% tax.

molerat · 3 October 2024 at 4:12PM

Retired2015 said:

This is the GOV.UK Tax Calculator using:
£39000 income (including State Pension)
Yes I'm Retired
38L Tax Code

Output from GOV.UK Tax Calculator
How we calculated this
Gross income
£39,000.00
Personal Allowance
£380.00
Taxable Income
£38,620.00
Income Tax at 20%
£7,540.00
Income Tax at 40%
£364.40
National Insurance
£0.00
Take-home pay
£31,095.60

I also rang HMRC and they confirmed I am paying 40% tax on earnings of £39000 p.a. (made up of State Pension £12,208.00 and Private pension £26882.70).

That is where you are going wrong. Your tax allowance is £12570, your tax allowance and your tax code are two entirely separate things. If you are using the £380 allowance then you only enter your non state pension income, if against all income then use the £12570.

Enter duff info you get duff info out

Ayr_Rage · 3 October 2024 at 4:21PM

The personal allowance of £380 should only be applied against the gross income/private pension amount of £26882.70 in a calculator.

You receive the state pension free of any tax.

What type of pension scheme are you receiving benefits from?

If you are exceeding certain limits more tax may be payable.

Pensioner Taxation

Comments

Under SP:-

Under SP:-

Under SP:-

How we calculated this

How we calculated this

Confirm your email address to Create Threads and Reply

🚀 Getting Started

Categories

Is this how you want to be seen?

Get our FREE Weekly email full of deals & guides - and it’s spam-free