Personal Allowance, or not ?

Spenditwhileyoucan

Hi All, First post please be gentle !!

I quit work 3 years ago and have been living off savings until this tax year. In September I drew down £8,000 ( 25% tax free leaving £6000 subject to tax ?  ) from a DC Pension, then from October I have been claiming my Final Salary pension at £1070 per month. I thought my Personal Allowance was £12570, and that I would only pay tax on £920. ie 7 months @ £1070 = £7490 + £6000 = £13490 - personal allowance £12570 = £920 taxable at 20%. The tax office are telling me I only get relief from one income is that right ? Is there any way to improve the situation ? I also thought if this is the case then should I draw down another £8000 from my DC pension in this tax year, and just pay tax on my £7490 FS pension, then next tax year ask for my FS pension to be my primary income and my personal allowance be set against that. Any helpful ideas would be very much appreciated.

Sarahspangles

Which of your pensions has been assigned the personal allowance? If you drew down £6k taxable income in September, and that triggered issue of a tax code, then you will pay too much tax on your monthly-paid pension. But you can claim back the tax overpaid at the end of the tax year.

Dazed_and_C0nfused

Spenditwhileyoucan said:

Hi All, First post please be gentle !!

I quit work 3 years ago and have been living off savings until this tax year. In September I drew down £8,000 ( 25% tax free leaving £6000 subject to tax ?  ) from a DC Pension, then from October I have been claiming my Final Salary pension at £1070 per month. I thought my Personal Allowance was £12570, and that I would only pay tax on £920. ie 7 months @ £1070 = £7490 + £6000 = £13490 - personal allowance £12570 = £920 taxable at 20%. The tax office are telling me I only get relief from one income is that right ? Is there any way to improve the situation ? I also thought if this is the case then should I draw down another £8000 from my DC pension in this tax year, and just pay tax on my £7490 FS pension, then next tax year ask for my FS pension to be my primary income and my personal allowance be set against that. Any helpful ideas would be very much appreciated.

I think you are almost certainly confusing each other.

As you took taxable money from the DC pension first then I would think that is likely to be your main source of income in HMRC's eyes (main doesn't necessarily mean largest monetary amount).

As you took £6k all in one go in September it is likely HMRC will think you are going to be receiving far more than your Personal Allowance from this pension in the current tax year.

You then started a second pension so HMRC will probably have allocated a basic rate (20% tax code to that pension.

Have you worked out exactly what taxable income you will receive from each of these pensions by 5 April 2025?  And if so have you clearly communicated that to HMRC?

What tax codes have been allocated to each of the pensions?

molerat

With only one income source - the drawdown - it is likely your full allowance would have been allocated there as they don't know how much you will be taking in future - what code is showing against that in your tax account ? How much tax was deducted from that and what code was used ?  You need to make sure your on line tax account shows the correct annual income from those 2 sources and maybe the code will get corrected.

Albermarle

In September I drew down £8,000 ( 25% tax free leaving £6000 subject to tax ?  ) from a DC Pension, 

This depends on the type of withdrawal. If you take a payment that is exactly 25% tax free cash and 75% taxable income, then it is known as an UFPLS payment. It looks like that is what you have had, but just be aware that there are other ways of withdrawing. For example some people may take just the tax free cash to begin with ( until it runs out) 

Regarding the tax code issue etc. it is good to be aware generally that when you start new sources of income ( two pensions in the same tax year in your case) there is often problems with tax codes. Remember that a tax code is only a way for HMRC to try and take the correct amount of tax. If it does not work out then any tax over or under paid will be finally calculated later.

Spenditwhileyoucan

Thank you all for your comments. The single application of personal tax allowance has been confirmed by you all and Albermarle's comment
"If it does not work out then any tax over or under paid will be finally calculated later" just further confirms that there is no wriggle room to get out of it. Therefore worth maximising the drawdown from my DC pension to take advantage of the whole personal allowance and just pay tax on my 7 months of DB pension....