How do you pay tax when taking a pension income?

KeiserSoze

Maybe a basic question but I'm gearing myself up for retirement in a couple of years so forgive my lack of knowledge. 

My question is what is the mechanism for paying tax when taking pension income? Looking online it seems HMRC give your pension provider a tax code and tax gets deducted at source so no need to complete a SA tax return (unless other criteria are met), which seems straightforward. 

But how would it work in the following scenarios;

(A) Aged 55, taking an annuity of £8500 plus two separate small DB pensions of £1k each, so total income £10500. Rest of 'income' is taken from savings 

Assume HMRC links your 3 pensions by your NI number and 'knows' the total is below the current tax free allowance and applies a tax code to take no tax? (Also assume I'd have to do a SA if any interest on savings are over £1k) 

(B) As above but at 67 and full SP taken. HMRC advice the providers of the relevant tax code which now is set to take IT as total income is over the tax free allowance, but as its 3 separate pots (and providers) which one does it take tax from at source?

I understand the SP is always paid in full and any IT is always taken from your own pension, is that correct?

Cheers!

molerat

They will split codes / allocate codes accordingly to deduct the correct amount of tax.  A pension is no different to a job, or several jobs, as far as PAYE is concerned.

A ) No need for SA unless interest is above £10K, they will sort it out through coding or a "bill", if you have only £10500 of pension income you can earn up to £8070 in interest tax free.

B ) The SP will be deducted from your tax allowance and the remaining allowance split as necessary, possibly BR being allocated to one or more of the income streams.

The PAYE system pretty much sorts itself, interest is the biggest fly in the ointment at the moment with estimates being used.  If you are expected to receive the full pension then you will have no spare allowance from 27-28 anyway as the SP will use it all up.

Albermarle

As above, but there is no guarantee they will get it right first time.
You will probably have to call them at some point ( at 08.00 is the best time) to agree the best way to allocate the codes.

p00hsticks

KeiserSoze said:

I understand the SP is always paid in full and any IT is always taken from your own pension, is that correct?

I think that they are only allowed to deduct up to 50% of the private pension, and so if it is small there may also be an a further amount outstanding. 

KeiserSoze

molerat said:

They will split codes / allocate codes accordingly to deduct the correct amount of tax.  A pension is no different to a job, or several jobs, as far as PAYE is concerned.

A ) No need for SA unless interest is above £10K, they will sort it out through coding or a "bill", if you have only £10500 of pension income you can earn up to £8070 in interest tax free.

Cheers. Is that £8070 means tested at all? E.g. if I had £10500 in income, but £200k in savings earning 4% so £8k pa in interest, I don't pay tax on that interest? 

molerat

KeiserSoze said:

molerat said:

They will split codes / allocate codes accordingly to deduct the correct amount of tax.  A pension is no different to a job, or several jobs, as far as PAYE is concerned.

A ) No need for SA unless interest is above £10K, they will sort it out through coding or a "bill", if you have only £10500 of pension income you can earn up to £8070 in interest tax free.

Cheers. Is that £8070 means tested at all? E.g. if I had £10500 in income, but £200k in savings earning 4% so £8k pa in interest, I don't pay tax on that interest? 

Correct.  You are allowed your personal allowance plus £5000 starter rate for savings plus £1000 personal savings allowance.  Any income above your personal allowance eats into that first £5000 until it is all used up leaving you with only £1000. Interest uses up the allowance in the order above.

Marcon

If you've not got a personal tax account, might be worth setting one up: https://www.gov.uk/personal-tax-account to help you keep track of tax codes etc.