Income Tax Question.

[sunoco69]

Hi all

If you have a job (say 34k) and a pension (10k) then you pay normal tax on one and basic rate on the other. Am I right so far?

If that is correct then which income would be the best to to pay BR on or would it not matter?

HMRC advised me to pay BR on main job and I suspect that it should be the other way round.

[Mattt]

Tax you pay at source is surely almost irrelevant, it all sorts itself out come self assessment time.

[sumo69]

You would normally have a tax code for each source - as it appears you are just into higher rate, the employment code will give you your personal allowance but also an estimated deduction to collect the small amount of higher rate tax whereas the pension will be a BR code ie 20% on all income.

It may be worth checking with HMRC that this is what they will do as it will save you completing a tax return to sort any under/overs.

David

[sunoco69]

Mattt said:

Tax you pay at source is surely almost irrelevant, it all sorts itself out come self assessment time.

Don't do self assessment as I am employed and the company does my tax. This is the correct way isn't it.

[sunoco69]

sumo69 said:

You would normally have a tax code for each source - as it appears you are just into higher rate, the employment code will give you your personal allowance but also an estimated deduction to collect the small amount of higher rate tax whereas the pension will be a BR code ie 20% on all income.

It may be worth checking with HMRC that this is what they will do as it will save you completing a tax return to sort any under/overs.

David

Thats the point really. The pension is taxed under a normal tax code, 944L I think or something similar. The main wage is taxed under BR.

My question is, would it be better if it was the other way round or would it make no difference to the amount I pay overall?

[Eric Mc]

sunoco69 said:

Hi all

If you have a job (say 34k) and a pension (10k) then you pay normal tax on one and basic rate on the other. Am I right so far?

If that is correct then which income would be the best to to pay BR on or would it not matter?

HMRC advised me to pay BR on main job and I suspect that it should be the other way round.

If you have two sources of income that should be both taxed under the PAYE system, then the key to ensuring that you pay the right income tax under PAYE is making sure that your PAYE code has been properly allocated to the two PAYE sources.

Two PAYE sources could be two employments or two pensions or (as in your situation) a pension and an employment.

The normal tax allowance for an individual for the current tax year (2013/14) is £9,440 which equates to a Tax Code of 944L. There may be specific reasons why a code of 944L is not applicable to you - you could have a Benefit in Kind (such as a company car or company health care) or HMRC might be using the PAYE code to give you additional tax relief - such as on a pension contribution).

You are saying that your total income for the year is £44,000 (£34,000 plus £10,000). This means that the PAYE system, if it works properly, should tax you correctly on income of £44,000. This equates to a tax bill for 2013/14 of £7,422.00.

£44,000 is high enough to put some of your income into the 40% Higher Rate tax bracket. (£1,020.00 of your income is taxable at 40%).

If one of your sources of PAYE earnings is allocated the coding of £9,440 and the other is taxed in full at Basic Rate (20%), you can see that by the time you get to the end of the 2013/14 tax year, you will have underpaid tax. This is because the PAYE system will have failed to calculate the top bit of your income (the £1,020.00) at 40%.

The correct procedure is to get HMRC to allocate a D0 coding to your pension income. This means that the pension income will be taxed in full, at source, at 40% (not 20%). This means you will be overpaying tax on the pension. However, the next step is to get your 944L coding allocated to your main source of PAYE income (your employment) and have it adjusted upwards slightly to recover the tax being overpaid on the pension.

PAYE is actually a messy way of paying tax - especially when there are more sources of PAYE earnings than a simple single employment. This is further compounded when the individual has further complications - like they are a higher rate taxpayer or they have benefits in kind or additional allowances.

The alternative to the above is to allow HMRC to get it wrong (something they are quite good at) and sort the situation out after the end of the tax year - perhaps by completing a self assessment tax return or by trying to get HMRC to fix matters by letters, phone calls etc.

[sunoco69]

Eric Mc said:

The alternative to the above is to allow HMRC to get it wrong (something they are quite good at) and sort the situation out after the end of the tax year - perhaps by completing a self assessment tax return or by trying to get HMRC to fix matters by letters, phone calls etc.

Thank you sir.

I did let them sort it out last time and ended up with a 4K bill. It was then that made the pension the main income and awarded it the standard code and my wage got the BR code. I dont have any benefits or any other concessions.
So doing as you suggest would save me some tax or not make any difference?

[oyster]

sunoco69 said:

Mattt said:

Tax you pay at source is surely almost irrelevant, it all sorts itself out come self assessment time.

Don't do self assessment as I am employed and the company does my tax. This is the correct way isn't it.

Do you have any savings income? Any at all? Dividend income?

You're a higher rate taxpayer, why wouldn't you complete a tax return?



I wonder how much tax evasion takes place by people (not the OP I'm referring to) not doing SA even though they have income that takes them into the higher tax brackets.

[Eric Mc]

sunoco69 said:

Eric Mc said:

The alternative to the above is to allow HMRC to get it wrong (something they are quite good at) and sort the situation out after the end of the tax year - perhaps by completing a self assessment tax return or by trying to get HMRC to fix matters by letters, phone calls etc.

Thank you sir.

I did let them sort it out last time and ended up with a 4K bill. It was then that made the pension the main income and awarded it the standard code and my wage got the BR code. I dont have any benefits or any other concessions.
So doing as you suggest would save me some tax or not make any difference?

I think this is not a matter of "saving tax" but simply one of making sure that you pay the CORRECT tax. If you can get the PAYE system to calculate the correct tax for you that would be good but PAYE often fails to do this.

And, as Oyster says, as a Higher Rate Taxpayer, you may need to consider completing a self Assessment tax return anyway if you have additional investment income that isn't taxed under the PAYE system - such as interest on savings or dividend income.

[sunoco69]

oyster said:

Do you have any savings income? Any at all? Dividend income?

You're a higher rate taxpayer, why wouldn't you complete a tax return?



I wonder how much tax evasion takes place by people (not the OP I'm referring to) not doing SA even though they have income that takes them into the higher tax brackets.

Well I have, my entire working life, let my employer and the tax man sort it out as that's kind of their job. Now if things have changed then I am more than happy to fill more government forms out but seeing as HMRC have never sent me any of these forms or mentioned them when they were squeezing the £4k back tax from me then how would I even know I had to do them?

I think that I may need to call the evil HMRC.

Thank you to yourself and Eric Mc.

Edited by sunoco69 on Friday 7th June 09:59

[Eric Mc]

Sadly, it is not HMRC's job to alert the taxpayer to the taxpayer's responsibility for making sue the correct tax is paid each year. It is the taxpayer's.

The PAYE system lulls taxpayers into a false sense of security as they tend to assume that HMRC and their employer are making sure everything is correct. Often times, they aren't and when the you know what hits the fan, HMRC will chase the taxpayer for the underpaid amounts.

[98elise]

sunoco69 said:

oyster said:

Do you have any savings income? Any at all? Dividend income?

You're a higher rate taxpayer, why wouldn't you complete a tax return?



I wonder how much tax evasion takes place by people (not the OP I'm referring to) not doing SA even though they have income that takes them into the higher tax brackets.

Well I have, my entire working life, let my employer and the tax man sort it out as that's kind of their job. Now if things have changed then I am more than happy to fill more government forms out but seeing as HMRC have never sent me any of these forms or mentioned them when they were squeezing the £4k back tax from me then how would I even know I had to do them?

I think that I may need to call the evil HMRC.

Thank you to yourself and Eric Mc.

Edited by sunoco69 on Friday 7th June 09:59

As Eric says, its your responsibility not HMRC. They probably won't know all your sources of income. For example if you are a high rate taxpayer, and you have any kind of interest paying savings account then its very likely you owe more tax.