State and company pension, continuing self-employment. Tax?
Discussion
66 today, so state pension starting (£202 a week). I already get two company DB pensions (£12k a year), and will be carrying on with my business (sole trader, around £10k profit p.a.).
Up until now, my tax code has been split across the 2 company pensions, and I submit a self-assessment each year, paying tax and NI on the earned income.
I assumed that HMRC would either tax my state pension at source, or reduce the tax codes on my company pensions so that the state pension uses the personal allowance. Someone told me that the state pension is always paid gross, and googling suggests that this is the case.
I don't want to end up with a big tax bill in a year's time when I submit my 2023/4 return, I'd rather pay the tax due on my pension income as I go.
Do I need to contact HMRC to make sure this happens?
Up until now, my tax code has been split across the 2 company pensions, and I submit a self-assessment each year, paying tax and NI on the earned income.
I assumed that HMRC would either tax my state pension at source, or reduce the tax codes on my company pensions so that the state pension uses the personal allowance. Someone told me that the state pension is always paid gross, and googling suggests that this is the case.
I don't want to end up with a big tax bill in a year's time when I submit my 2023/4 return, I'd rather pay the tax due on my pension income as I go.
Do I need to contact HMRC to make sure this happens?
Simplest thing to do is to work out what the tax is, and stick it in the building soc until you need to pay it.
Or you could ask your DB pension people. It must be a familiar problem for them.
They should be given a new tax code. HMRC has the information every month from payroll these days.
Or you could ask your DB pension people. It must be a familiar problem for them.
They should be given a new tax code. HMRC has the information every month from payroll these days.
I decided to call HMRC anyway. They have now assigned all of my personal allowance to one of the DB pensions, and as soon as the first state pension payment goes through, part of the tax code will be reassigned to the state pension payments.
The person I spoke to said this was the best way to do it during the period when the state pension starts, and will ensure that any tax due on the 3 pensions will be deducted at source.
Currently my tax code is split between the 2 DB pensions, but this would apparently complicate matters going forwards.
I'll continue to put £200 a month into a savings account to cover SA liabilities.
I also asked about NI contributions. Obviously I will no longer have to pay class 2 or class 4 on my self-employment income, but I asked about the extra 1% (or was it 1.5%?) NHS/Social Care "loading" that was proposed in the budget a while ago. I was told at the time that this extra loading would also be payable by pensioners who continued to work, even though they wouldn't be paying the standard NI rates.
Is this still the case, or was the idea dropped? HMRC person couldn't answer that one.
The person I spoke to said this was the best way to do it during the period when the state pension starts, and will ensure that any tax due on the 3 pensions will be deducted at source.
Currently my tax code is split between the 2 DB pensions, but this would apparently complicate matters going forwards.
I'll continue to put £200 a month into a savings account to cover SA liabilities.
I also asked about NI contributions. Obviously I will no longer have to pay class 2 or class 4 on my self-employment income, but I asked about the extra 1% (or was it 1.5%?) NHS/Social Care "loading" that was proposed in the budget a while ago. I was told at the time that this extra loading would also be payable by pensioners who continued to work, even though they wouldn't be paying the standard NI rates.
Is this still the case, or was the idea dropped? HMRC person couldn't answer that one.
Hi,
DWP can't / won't deduct tax from state pension, so HMRC have to adjust available tax allowances against other income.
HMRC's preferred way is to deduct the state pension from the Personal Allowance & then allocate what's left of it (the PA) to the pension source (as it's a continuing source of income). Any other income is then taxable at basic (& higher rate if applicable), making all the sums easier & likely to avoid under or overpayments at the year's end.
It can get messy if the net allowances after deducting the state pension exceed the main pension source. Then they need to be split across the pensions. But HMRC don't know what the pensions are going to be - they only have historical data - and there's the possibility that too many may go to one pension & be "wasted", in which case an overpayment of tax is likely. And then who knows when they'll get round to doing a refund.
If the total income (state pension, occupational pensions, other income) is liable to bring you into the higher rates, then there will probably be tax due at the year end. Each PAYE source doesn't know what the other is paying and you don't know what your non-PAYE source is likely to be until the year end. HMRC may be able to adjust codes, but it's unlikely to be 100%. Probably easier just to put some money to one side & use it to pay the self-assessment bill idc.
DWP can't / won't deduct tax from state pension, so HMRC have to adjust available tax allowances against other income.
HMRC's preferred way is to deduct the state pension from the Personal Allowance & then allocate what's left of it (the PA) to the pension source (as it's a continuing source of income). Any other income is then taxable at basic (& higher rate if applicable), making all the sums easier & likely to avoid under or overpayments at the year's end.
It can get messy if the net allowances after deducting the state pension exceed the main pension source. Then they need to be split across the pensions. But HMRC don't know what the pensions are going to be - they only have historical data - and there's the possibility that too many may go to one pension & be "wasted", in which case an overpayment of tax is likely. And then who knows when they'll get round to doing a refund.
If the total income (state pension, occupational pensions, other income) is liable to bring you into the higher rates, then there will probably be tax due at the year end. Each PAYE source doesn't know what the other is paying and you don't know what your non-PAYE source is likely to be until the year end. HMRC may be able to adjust codes, but it's unlikely to be 100%. Probably easier just to put some money to one side & use it to pay the self-assessment bill idc.
clockworks said:
I also asked about NI contributions. Obviously I will no longer have to pay class 2 or class 4 on my self-employment income, but I asked about the extra 1% (or was it 1.5%?) NHS/Social Care "loading" that was proposed in the budget a while ago. I was told at the time that this extra loading would also be payable by pensioners who continued to work, even though they wouldn't be paying the standard NI rates.
Are you sure about not having to pay NI? I'd be interested to know if it's correct as it may be relevant to me in the future. Mr Pointy said:
Are you sure about not having to pay NI? I'd be interested to know if it's correct as it may be relevant to me in the future.
No NI payable after reaching state pension age - except class 4 for self-employment. This is payable until the end of the tax year in which you reach state pension age.Personally, my profits from self-employment are below the class 4 threshold anyway (£12570). I only pay class 2 now - unless the NHS surcharge is still a thing?
Your State Pension is never taxed at source. What HMRC does is allocate most (in many cases, all) of your personal allowances to the State Pension. That means that there will be no tax deducted from the State Pension.
As a result, little or none of the personal allowances will be left for allocation against your other income i.e. other pensions, other employments or self employed earnings. Employers and other pension providers will, most likely, put you on a Basic Rate (BR) code which means that your other pensions will be taxed in full at 20%.
If your income levels are high (especially with the State Pension now included) and you are now going into Higher Rate Tax areas, you might find one of the pension providers will have to apply a D0 tax code, which means they will apply a straight 40% tax to your pension.
Monitor the situation carefully as HMRC does not always get the allocation of Personal Alowances right - especially in the first year in which you started receiving the State Pension.
As a result, little or none of the personal allowances will be left for allocation against your other income i.e. other pensions, other employments or self employed earnings. Employers and other pension providers will, most likely, put you on a Basic Rate (BR) code which means that your other pensions will be taxed in full at 20%.
If your income levels are high (especially with the State Pension now included) and you are now going into Higher Rate Tax areas, you might find one of the pension providers will have to apply a D0 tax code, which means they will apply a straight 40% tax to your pension.
Monitor the situation carefully as HMRC does not always get the allocation of Personal Alowances right - especially in the first year in which you started receiving the State Pension.
Saleen836 said:
Random suggestion but you can always defer the state pension if you don't need the money yet and are worried about income tax, of course delaying claiming the state pension will increase it by approx 5.8% for every 12 months it is delayed
So if you delay for a year, your £202/week goes up by about £12/month next year. So an extra £620 /year But of course, you've lost out on £10,500 that you could have claimed in that year. So you need to live about 17 years, to 83, just to break even. That seems like a lousy deal to me. If you took the £202/week you don't need and bought premium bonds with it, you'd almost certainly pick up quite a few wins over the next 17 years too.
(I get that about 20% of that £202 would be lost in tax being paid on your other income, which needs to be factored in). Even so, seems crap.
Eric Mc said:
Your State Pension is never taxed at source. What HMRC does is allocate most (in many cases, all) of your personal allowances to the State Pension. That means that there will be no tax deducted from the State Pension.
As a result, little or none of the personal allowances will be left for allocation against your other income i.e. other pensions, other employments or self employed earnings. Employers and other pension providers will, most likely, put you on a Basic Rate (BR) code which means that your other pensions will be taxed in full at 20%.
If your income levels are high (especially with the State Pension now included) and you are now going into Higher Rate Tax areas, you might find one of the pension providers will have to apply a D0 tax code, which means they will apply a straight 40% tax to your pension.
Monitor the situation carefully as HMRC does not always get the allocation of Personal Alowances right - especially in the first year in which you started receiving the State Pension.
The HMRC woman I spoke to said that she had reallocated my personal allowance between my 2 DB pensions for now, and that one of them will switch to the state pension as soon as the first payment goes through. That should keep it more or less correct, but I will keep an eye on it.As a result, little or none of the personal allowances will be left for allocation against your other income i.e. other pensions, other employments or self employed earnings. Employers and other pension providers will, most likely, put you on a Basic Rate (BR) code which means that your other pensions will be taxed in full at 20%.
If your income levels are high (especially with the State Pension now included) and you are now going into Higher Rate Tax areas, you might find one of the pension providers will have to apply a D0 tax code, which means they will apply a straight 40% tax to your pension.
Monitor the situation carefully as HMRC does not always get the allocation of Personal Alowances right - especially in the first year in which you started receiving the State Pension.
No danger of hitting the 40% tax band. Only ever happened to me once, when I was PAYE and did a lot of overtime for a couple of months.
I can live comfortably on well under £2k a month, so I really don't need to earn much at all. Earnings from self-employment are basically for "luxuries" and hobbies.
TwigtheWonderkid said:
Saleen836 said:
Random suggestion but you can always defer the state pension if you don't need the money yet and are worried about income tax, of course delaying claiming the state pension will increase it by approx 5.8% for every 12 months it is delayed
So if you delay for a year, your £202/week goes up by about £12/month next year. So an extra £620 /year But of course, you've lost out on £10,500 that you could have claimed in that year. So you need to live about 17 years, to 83, just to break even. That seems like a lousy deal to me. If you took the £202/week you don't need and bought premium bonds with it, you'd almost certainly pick up quite a few wins over the next 17 years too.
(I get that about 20% of that £202 would be lost in tax being paid on your other income, which needs to be factored in). Even so, seems crap.
However my wife is very much a 'live for today' person and we've both had a health scares over the last couple of years so she thought it was ridiculous to delay it, so I've taken it.
Regarding the tax, I had a new tax code that included the state pension two days after my 66th birthday, a couple of weeks before I got the first pension payment.
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