Can you tell me what my state pension amount should be included in when filling out my self-assessment if my state pension minus my personal allowance is reduced to make up for my tax code?
I will have to do a self-assessment as I get some overseas pension here as well as a small UK teacher’s pension. I always credit the UK teacher’s pension amount and all overseas pensions on my self-assessed return, along with the state pension, every year.
However, now that I know the relationship between the tax code and personal allowance, I realize that I’m not getting my full personal allowance each year and feel like I’m actually paying taxes on the state pension twice
Retirement Finance: Am I Paying Taxes Twice on My State Pension? (stock image)
It does not seem reasonable to reduce my personal allowance to receive tax in one go and then charge me tax on state pension in my return.
Am I right? I would be grateful if you could give me an answer to my question here as it still bothers me a lot after talking to HMRC.
This is all very confusing and no one will give me reason in writing so that I can digest it easily. I hope you can either tell me if it is worth going ahead or where else I can get help for this.
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Steve Webb replies: The good news is that you’re not being taxed twice on your state pension.
As you appreciate, state pensions and private pensions generally count as part of your taxable income. But whether you actually have to pay tax and, if so, how much, depends on how your total taxable income compares with your tax-exempt personal allowance.
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To calculate your tax bill at the end of the year, HRMC first adds up all your pension income, plus any other taxable income such as income from property, etc. Next, they subtract your personal allowance, which is currently £12,570.
If your total taxable income is under your personal allowance, no tax is payable.
If your taxable income exceeds your personal allowance, you pay tax on the excess.
The tax is first levied at a basic rate of 20 percent and then at higher rates depending on how much additional taxable income you have. (Different rates and allowances apply to things like income from savings and dividends).
Based on the above details, you are fine to provide HMRC with the details of all your pension and other taxable income and they will check at the end of the year whether the correct amount of tax has been deducted during the year.
However, HMRC also tries to deduct the correct amount of tax each month through the year so that year-end adjustments are not required. And the way they do this creates some confusion.
For most people, the amount of state pension they receive is within the tax limit of £12,570. (There are some people who get more than this in state pension but they are in minority).
DWP pays your state pension gross before any taxes are deducted. HMRC then offsets all of your state pension against your tax allowance, and then uses any unused tax allowances as a tax code used by the Teachers Pension Scheme and other pension providers.
You could argue that this means you pay ‘not enough’ tax on your state pension and ‘too much’ tax on your teachers’ pension.
But the only thing that matters is that at the end of the year you paid the correct total amount of tax, and the system gives the correct result as a whole.
To give a simple example, let’s say your state pension is £8,570 per year and you have a personal pension of £9,000 per year.
HMRC has calculated that you have £4,000 of ‘unused’ tax allowance, with a personal tax allowance of £12,570 when they have accounted for your state pension (from which no tax is deducted by the DWP).
They send a tax code of £4,000 to a private pension provider. This means that the first £4,000 of your personal pension is tax-free and the remaining £5,000 is taxed at a basic rate of 20 percent.
You will pay £1,000 in income tax through this route over the course of the year.
As it happens, all of that £1,000 will be collected by your private pension provider and paid to HMRC. But at the end of the year, HMRC will investigate.
They would say that your total income (state plus personal) was £17,570, that you had a personal allowance of £12,570, so you have taxable income of £5,000 on which 20 percent tax was payable.
By the end of the year your tax return will show that you should have paid £1,000 as tax and this is exactly the amount deducted on your behalf, so no further adjustments are needed.
I know tax issues can be confusing, especially for people with more complex tax situations.
For anyone with the modest means who needs help, I can recommend the charity ‘Tax Assistance for Older People’, which has hundreds of expert volunteers who work freely to help people navigate the system. Give your time. Their website is here.
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