Strange taxcode increase for pension and giftaid relief

mfn123

As a retiree paying tax at basic rate, I give some giftaid and make a small SIPP contribution each year to avoid going into higher rate band.

I just got a new taxcode on my main pension that increases the net monthly payment by £250pm - i.e. it will decrease the tax paid by about £2500 over the rest of the year. This makes no sense to me because surely I will have to pay that back in my next 2026-27 SA.

When I looked at the explanation in my HMRC tax account, it says

What increases your tax-free amount
Personal Pension Payments £3,577
Total Gift Aid payments £1,327

The figures I put in my 2025-26 SA (which seems to have triggered the taxcode change) almost tie up with that - I made £1261 gross giftaid contribution, and £2880 net (3600 gross) SIPP contribution, buy why would those increase my tax-free amount at all?

On that basis, if I gave another £1000 with giftaid, I would get £200 tax back, and the charity would also get the same relief!

I might be tempted to let sleeping dogs lie and get savings interest on the excess until year end, but it would increase my tax due then by £2500, and reduce my tax paid by PAYE to below 80%, so I would have to make start making payments on account - not ideal.

Has anyone else had similar odd taxcode changes?

The HMRC guidance about correcting taxcodes seems to be geared to providing them with new information about income, not about correcting their calculation. I had assumed it was automated, but could it have been human error?

Isthisforreal99

What is your actual projected taxable income. An adjustment is needed to your tax code to give you any higher rate relief due but the estimated income HMRC have needs to be accurate.

mfn123

https://forums.moneysavingexpert.com/discussion/comment/82035566#Comment_82035566

My PAYE summary for 2026-27 shows projected pension income of about 47k, and non-coded income of 7700, so about 55k in total - i.e. into the HR band before any pension and giftaid relief.

So if HMRC think I might pay HR, I suppose it makes sense for them to adjust my tax code, but surely not to reduce it so much that I will have a tax bill of £2500 at year end? I thought the effect of SIPP and giftaid was to extend the BR band, not to increase the non-taxable amount, so the explanation is a bit misleading. Perhaps its just an unfortunate edge case caused by me being near the HR threshold.

I suspect my best option is to tell HMRC about my expected savings income for 2026-27 (i.e. replace the projected non-coded income), so that the taxcode includes that income and at least gets me above the 80% threshold paid via PAYE. After that, I don't really care if the amount per month is a bit low or high, as a long as I don't have to make payments on account for 2027-28.

Does that make sense - or have I misunderstood?

Thanks

zagfles

Well if that tax free amount increase increases your net monthly payment by £250 then you clearly are paying higher rate tax on the pension (about £5k pa increase gets you £3k pa net so that's 60% net, ie 40% tax). Is there also a reduction to your tax free amount because of the non coded income? Or are you in Scotland? What is your actual tax code?

mfn123

https://forums.moneysavingexpert.com/discussion/comment/82035929#Comment_82035929

Good point! As you say, this 4900 difference should only generate 1k income difference at 20%.

For what its worth, my old 2026-27 code was K65 and the new one is 424L, but I think I was extrapolating wrongly from my June pension payslip - just because its 250 more net in June, maybe it won't be in future months. Do in-year taxcode changes get applied like that - naively I just assumed I would get the same each month. Oops…

If we assume the pension payroll does the right thing over the rest of the year, and reduces my tax paid overall by about 1k rather than 2500, then I may still have the problem of paying less than 80% by PAYE. My previous thought of providing 2026-27 interest income estimate to HMRC to decrease the taxcode (and so increase the PAYE tax over 80%) still seems good to me. Anyone disagree?

zagfles

Why do you think it's wrong? With that tax code some of the pension income is being taxed at 40%. 47000-4249-37700 leaves 5051 taxed at 40% with 37700 taxed at 20%, so 9560 tax.

Income tax due on 47000 + 7700 with £5k gift aid/pension conts would all be taxed at 20% after the PA so 8426.

If anything it looks like you're paying too much tax with that tax code not too little.

mfn123

https://forums.moneysavingexpert.com/discussion/comment/82036355#Comment_82036355

Aha. I think I understand the confusion now. The 47k is my total pension including 13k SP. The main pension with tax code is only 34k, so the sum is really 34000 - 4240, which is well under 37700, so no 40% tax.

Goind back to my point about replacing the noncoded income by declared interest and dividends…

With the old code, the expected PAYE tax on main pension was about 7k (34k + 650 @ 20%), whereas it will now be about 6k (34k - 4240 @ 20%). As I will still have to pay about 1k tax at year-end on the other income (depends on the mix of interest and dividends), I would expect year-end bill of about 2k. Since the total tax is 8k, but only 6k (75%) is via PAYE, I would have to make payments on account for 2027-28. However, If I declare the expected interest and dividends, the PAYE tax would go up to 7k (83%) and payments on account would no longer be needed.

Who knows - maybe if I update the declaration of expected income and remove the noncoded income, the taxcode will revert to "as it should be", but somehow I doubt it!

zagfles

Does your estimate for your main pension paid by PAYE include the state pension? That could be what's wrong. Otherwise it makes no sense. It still doesn't really make sense to me anyway as I'd expect the pension conts/gift aid to increase the tax free amount by half the expected conts not the full amount if they thought you'd be paying higher rate tax on the PAYE income.

mfn123

https://forums.moneysavingexpert.com/discussion/comment/82036978#Comment_82036978

Yes I think thats what I meant. When I said projected income of 47k, I was adding main pension (34k) and SP (13k). My main pension had old taxcode K65 that allowed for the untaxed SP - i.e. all my 12570 PA was used by the SP. With the new 424L taxcode, its as if my PA was increased by 5k because of the SIPP and giftaid, leaving 4240 tax-free from my main pension before taxing at 20%.

I'm still mystified as to why they did that, but unless someone has a cunning explanation, I'm inclined to accept it as an HMRC quirk, and just work round it by adding expected income declaration to avoid need for end-of-year payment on account.

Thanks for your help though!

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82037013#Comment_82037013

I meant the estimate showing on the HMRC tax account - is that showing £47k or £34k for the PAYE pension? If it's showing £47k update it to show £34k and hopefully things will get corrected.

mfn123

Sorry if I was ambiguous. The PAYE pension is 34k, as listed on PTA > PAYE > Check current pay pension and income tax details:

• latest activity (i.e. recent taxcode changes)
• employment income (none in my case)
• pension income
  • state pension 13.2k
  • main pension 34.2k, taxcode 424L