State Pension and Personal allowance

german_keeper

I never really understand why people think someone on a pension should pay less tax than someone on a similar income working his/her backside off for minimum wage, often with a family to bring up. Does seem to be quite a commonly held opinion though.

xylophone

Likelihood is that your father started work in the early fifties.

He may have accrued Basic State Pension (currently full BSP is £169.50), Graduated Pension (1961 - 75), and State Earnings Related Pension (to 2002).

You mention a GMP so it appears that at some point between 1978 and 1997 he was a member of a contracted out pension scheme.

If you have looked at his annual statement from DWP you should see the elements that make up his SP, including the Contracted

Out Deduction from pre 97 SERPS.

If he is paying tax then his SP plus other taxable income exceed his Personal Allowance.

His SP is paid gross so tax owed is taken from his occupational pension up to a certain percentage with the balance calculated

after he has submitted his SA and paid as indicated by HMRC.

This is how it works for a relative who has SP plus occupational pension plus other taxable income.

Cobbler_tone

hugheskevi said:

Cobbler_tone said:

eskbanker said:

Cobbler_tone said:

I always think it is pretty bad that an 87 year old working class elderly man pays tax on every single piece of income he receives.

Like everyone else, regardless of gender, age, social status and employment, his taxable income is totalled, and anything over his personal allowance (which will accommodate the vast bulk of his state pension) is then taxed.

Maybe 'ironic' rather than 'bad', appreciate that those are the rules just being applied.
We spend our whole lives paying hundreds of thousands in tax. Then once you stop earning and have a far more modest income you can end up with a negative personal tax allowance. Then you die and someone will often pay some more tax.
I'm surprised a new born baby doesn't get a tax bill. 

I think the UK pension system is unduly generous in terms of tax avoidance.

An individual is able to draw £50,270 of taxable pension income every year between 55/57 and 66-68 without paying higher rate tax. Using UFPLS, that is up to £67,000 of income p/a without paying higher rate tax. After State Pension age that declines a bit, but there is still about £38,000 of taxable income available before higher rate tax, or about £50,000 p/a using UFPLS.

That is a huge amount of money that can be saved from higher/additional rate tax during working life to fund the post 55/57 period. The incentive is enormous, and each partner is treated separately so around £134,000 can be taken from UFPLS without paying higher rate tax for an early retired couple. I'm very much looking forward to it myself, but find it difficult to justify given that almost all of my and my wife's pension has come from income that would have been subject to higher rate tax, and now when received will be subject to something like a 15% tax rate (some will be 0%, some 15%, some 20%, some 30% and some 40% but it will probably average out at 15-20% I expect).

That's great but I know my dad has a combined income of around £29k (state and private) and has a minus tax code. Granted, I have no idea what savings he has but he won't have hundreds of thousands in the bank and does his ISA. No self assessments or anything like that. His life and finances are as simple as it gets for a working class pensioner. He is certainly one who won't miss the winter fuel allowance. Not saying he could probably do with some financial advice (he has £35k in a 0% current account in case he buys a car!  ) but there is more chance of him seeing a flying pig than engaging with one and at his age I don't think he is too worried about his finances and tax commitments.

zagfles

german_keeper said:

I never really understand why people think someone on a pension should pay less tax than someone on a similar income working his/her backside off for minimum wage, often with a family to bring up. Does seem to be quite a commonly held opinion though.

Maybe because they've already been taxed on the contributions they've made towards the state pension (ie NI). There's no tax relief on NI contributions. Someone who works their backside off for min wage and pays NI towards the state pension with no tax relief, will then get taxed again when their NI payments get them a state pension, if it exceeds the PA. 

That's why taxing the state pension when it exceeds the PA is controversial and something the govt will look to avoid happening to people on the full NSP. Perhaps though reintroducing a pensioner tax allowance. 

molerat

Many people seem to think that a K tax code is reducing their personal allowance when the fact is the tax code has nothing to do with the personal allowance but is merely a tool to try to collect the correct amount of tax whilst taking account of untaxed at source but otherwise taxable income.  In a similar vein receiving the marriage allowance increases your tax code but does not increase your personal allowance, it simply allows for the additional £252 tax saving.

hugheskevi

Cobbler_tone said:

hugheskevi said:

Cobbler_tone said:

eskbanker said:

Cobbler_tone said:

I always think it is pretty bad that an 87 year old working class elderly man pays tax on every single piece of income he receives.

Like everyone else, regardless of gender, age, social status and employment, his taxable income is totalled, and anything over his personal allowance (which will accommodate the vast bulk of his state pension) is then taxed.

Maybe 'ironic' rather than 'bad', appreciate that those are the rules just being applied.
We spend our whole lives paying hundreds of thousands in tax. Then once you stop earning and have a far more modest income you can end up with a negative personal tax allowance. Then you die and someone will often pay some more tax.
I'm surprised a new born baby doesn't get a tax bill. 

I think the UK pension system is unduly generous in terms of tax avoidance.

An individual is able to draw £50,270 of taxable pension income every year between 55/57 and 66-68 without paying higher rate tax. Using UFPLS, that is up to £67,000 of income p/a without paying higher rate tax. After State Pension age that declines a bit, but there is still about £38,000 of taxable income available before higher rate tax, or about £50,000 p/a using UFPLS.

That is a huge amount of money that can be saved from higher/additional rate tax during working life to fund the post 55/57 period. The incentive is enormous, and each partner is treated separately so around £134,000 can be taken from UFPLS without paying higher rate tax for an early retired couple. I'm very much looking forward to it myself, but find it difficult to justify given that almost all of my and my wife's pension has come from income that would have been subject to higher rate tax, and now when received will be subject to something like a 15% tax rate (some will be 0%, some 15%, some 20%, some 30% and some 40% but it will probably average out at 15-20% I expect).

That's great but I know my dad has a combined income of around £29k (state and private) and has a minus tax code. Granted, I have no idea what savings he has but he won't have hundreds of thousands in the bank and does his ISA. No self assessments or anything like that. His life and finances are as simple as it gets for a working class pensioner. He is certainly one who won't miss the winter fuel allowance. Not saying he could probably do with some financial advice (he has £35k in a 0% current account in case he buys a car!  ) but there is more chance of him seeing a flying pig than engaging with one and at his age I don't think he is too worried about his finances and tax commitments.

Why the emphasis on the Tax Code?

Tax codes are just a way to ensure that most people pay about the right amount of tax in roughly the same amount each month across the financial year.

Would it be better if a standard Tax Code was applied against the State Pension and the private pension taxed at code BR instead, even though it would add up to the same thing in amount of tax paid?

Or is the issue a belief that the State Pension should be non-taxable, or that pensioners should have a higher Personal Allowance?

Cobbler_tone

hugheskevi said:

Cobbler_tone said:

hugheskevi said:

Cobbler_tone said:

eskbanker said:

Cobbler_tone said:

I always think it is pretty bad that an 87 year old working class elderly man pays tax on every single piece of income he receives.

Like everyone else, regardless of gender, age, social status and employment, his taxable income is totalled, and anything over his personal allowance (which will accommodate the vast bulk of his state pension) is then taxed.

Maybe 'ironic' rather than 'bad', appreciate that those are the rules just being applied.
We spend our whole lives paying hundreds of thousands in tax. Then once you stop earning and have a far more modest income you can end up with a negative personal tax allowance. Then you die and someone will often pay some more tax.
I'm surprised a new born baby doesn't get a tax bill. 

I think the UK pension system is unduly generous in terms of tax avoidance.

An individual is able to draw £50,270 of taxable pension income every year between 55/57 and 66-68 without paying higher rate tax. Using UFPLS, that is up to £67,000 of income p/a without paying higher rate tax. After State Pension age that declines a bit, but there is still about £38,000 of taxable income available before higher rate tax, or about £50,000 p/a using UFPLS.

That is a huge amount of money that can be saved from higher/additional rate tax during working life to fund the post 55/57 period. The incentive is enormous, and each partner is treated separately so around £134,000 can be taken from UFPLS without paying higher rate tax for an early retired couple. I'm very much looking forward to it myself, but find it difficult to justify given that almost all of my and my wife's pension has come from income that would have been subject to higher rate tax, and now when received will be subject to something like a 15% tax rate (some will be 0%, some 15%, some 20%, some 30% and some 40% but it will probably average out at 15-20% I expect).

That's great but I know my dad has a combined income of around £29k (state and private) and has a minus tax code. Granted, I have no idea what savings he has but he won't have hundreds of thousands in the bank and does his ISA. No self assessments or anything like that. His life and finances are as simple as it gets for a working class pensioner. He is certainly one who won't miss the winter fuel allowance. Not saying he could probably do with some financial advice (he has £35k in a 0% current account in case he buys a car!  ) but there is more chance of him seeing a flying pig than engaging with one and at his age I don't think he is too worried about his finances and tax commitments.

Why the emphasis on the Tax Code?

Tax codes are just a way to ensure that most people pay about the right amount of tax in roughly the same amount each month across the financial year.

Would it be better if a standard Tax Code was applied against the State Pension and the private pension taxed at code BR instead, even though it would add up to the same thing in amount of tax paid?

Or is the issue a belief that the State Pension should be non-taxable, or that pensioners should have a higher Personal Allowance?

My bad and that makes sense. As I don't operate in the 'post work' world yet, I wrongly assumed you would get a basic (1257) tax code and that you would pay tax (if you had a combined income of £29k + any savings interest over the limits) on £16,430. You are saying that because tax is not deducted from the state pension (yet!) the tax code has to be adjusted to recover the tax where another income is paid? So the result is the same. 

zagfles

hugheskevi said:

Cobbler_tone said:

hugheskevi said:

Cobbler_tone said:

eskbanker said:

Cobbler_tone said:

I always think it is pretty bad that an 87 year old working class elderly man pays tax on every single piece of income he receives.

Like everyone else, regardless of gender, age, social status and employment, his taxable income is totalled, and anything over his personal allowance (which will accommodate the vast bulk of his state pension) is then taxed.

Maybe 'ironic' rather than 'bad', appreciate that those are the rules just being applied.
We spend our whole lives paying hundreds of thousands in tax. Then once you stop earning and have a far more modest income you can end up with a negative personal tax allowance. Then you die and someone will often pay some more tax.
I'm surprised a new born baby doesn't get a tax bill. 

I think the UK pension system is unduly generous in terms of tax avoidance.

An individual is able to draw £50,270 of taxable pension income every year between 55/57 and 66-68 without paying higher rate tax. Using UFPLS, that is up to £67,000 of income p/a without paying higher rate tax. After State Pension age that declines a bit, but there is still about £38,000 of taxable income available before higher rate tax, or about £50,000 p/a using UFPLS.

That is a huge amount of money that can be saved from higher/additional rate tax during working life to fund the post 55/57 period. The incentive is enormous, and each partner is treated separately so around £134,000 can be taken from UFPLS without paying higher rate tax for an early retired couple. I'm very much looking forward to it myself, but find it difficult to justify given that almost all of my and my wife's pension has come from income that would have been subject to higher rate tax, and now when received will be subject to something like a 15% tax rate (some will be 0%, some 15%, some 20%, some 30% and some 40% but it will probably average out at 15-20% I expect).

That's great but I know my dad has a combined income of around £29k (state and private) and has a minus tax code. Granted, I have no idea what savings he has but he won't have hundreds of thousands in the bank and does his ISA. No self assessments or anything like that. His life and finances are as simple as it gets for a working class pensioner. He is certainly one who won't miss the winter fuel allowance. Not saying he could probably do with some financial advice (he has £35k in a 0% current account in case he buys a car!  ) but there is more chance of him seeing a flying pig than engaging with one and at his age I don't think he is too worried about his finances and tax commitments.

Why the emphasis on the Tax Code?

Tax codes are just a way to ensure that most people pay about the right amount of tax in roughly the same amount each month across the financial year.

Would it be better if a standard Tax Code was applied against the State Pension and the private pension taxed at code BR instead, even though it would add up to the same thing in amount of tax paid?

Or is the issue a belief that the State Pension should be non-taxable, or that pensioners should have a higher Personal Allowance?

Making the state pension non taxable would make sense, taxing the state pension is not really any different to taxing any investment/insurance payout where no tax relief has been granted on the premiums/contributions. It's double taxation. 

Obviously that won't happen without some offset, it would be far too costly. A really controversial idea, which would make sense in the current environment where the govt is trying to get people into work/not retire early, would be to make the state pension non taxable but also only allow the PA to be used against earned income (not pension/investment income). But no govt would be brave enough to do that. 

Sarahspangles

Cobbler_tone said:

My bad and that makes sense. As I don't operate in the 'post work' world yet, I wrongly assumed you would get a basic (1257) tax code and that you would pay tax (if you had a combined income of £29k + any savings interest over the limits) on £16,430. You are saying that because tax is not deducted from the state pension (yet!) the tax code has to be adjusted to recover the tax where another income is paid? So the result is the same. 

Pensioners may be on PAYE, in which case the private pension has tax deducted, with the tax code factoring in that the state pension has used most of the personal allowance.

However increasing numbers are on Simple Assessment which works more like Self Assessment. Most will get a bill around now for tax on last year’s pension(s) and savings income, and have until the end of Jan to either pay or agree a payment arrangement. This resolves the issue where not enough tax can be taken from the private pension via PAYE to cover the tax due.

Cobbler_tone

Sarahspangles said:

Cobbler_tone said:

My bad and that makes sense. As I don't operate in the 'post work' world yet, I wrongly assumed you would get a basic (1257) tax code and that you would pay tax (if you had a combined income of £29k + any savings interest over the limits) on £16,430. You are saying that because tax is not deducted from the state pension (yet!) the tax code has to be adjusted to recover the tax where another income is paid? So the result is the same. 

Pensioners may be on PAYE, in which case the private pension has tax deducted, with the tax code factoring in that the state pension has used most of the personal allowance.

However increasing numbers are on Simple Assessment which works more like Self Assessment. Most will get a bill around now for tax on last year’s pension(s) and savings income, and have until the end of Jan to either pay or agree a payment arrangement. This resolves the issue where not enough tax can be taken from the private pension via PAYE to cover the tax due.

Thanks Sarah, every day is a school day.
His code changed from 75L to K52 but looking at one of his statements he did receive a one off £3k this year for GMP.