The Lemon Fool

What are the mechanics of paying tax as a pensioner?

I'm in full time employment and some way off retirement. My tax is all dealt with via PAYE, so it's not something I need to deal with directly.

But I want to think ahead to when I retire. I will get some income from a defined benefit company scheme, a defined contribution company scheme and I also have a SIPP. There's also the state pension. (I also hold ISAs, but I know I don't need to worry about tax in this case).

So how do you actually pay any tax you owe? Do the pensions companies do any of the work, like PAYE? Or do you have to add up your own income, subtract the thresholds, and send information (and possibly cash!) to the tax office? Are you obliged to do a tax return? I'm totally clueless as to how it will work.

Thanks.

MrFoolish wrote: So how do you actually pay any tax you owe? Do the pensions companies do any of the work, like PAYE?

It runs under PAYE. A complication is when there are multiple sources of income, so it can need a little fine tuning on the tax codes to ensure that too much tax isn't deducted. It's a similar problem to anyone with multiple employments.

What I have done since I retired is make a self assessment return each year. HMRC gives me a tax code which when I drawdown from my SIPP. the administrator uses. It is always wrong though, either taking too much or not enough tax, largely because my taxable income varies a lot from one year to the next. I do not have any regular income such as from a pension except the State Pension which is paid gross but have some taxable dividends and sometimes CGT.

Not something to worry about.

Alaric is not quite right. It can 'run under PAYE' but in my case it certainly does not.

Dod

Its simple really. You are given a tax code and all the people paying your pensions, past employers, annuity providers etc are given this code and deduct the appropriate tax.

If you're happy to cope with being temporarily over-taxed then if you stay passive it will all (usually) eventually sort itself out via the various payroll systems.

(As long as you have no other complicating factors that might necessitate self-assessment.)

Scott.

I am not retired.

However it is my understanding that UK pension funds are part of the PAYE system (in general). Hence if you get state pension and have a very small DB or DC in drawdown paying a taxable £6k, you will be liable for tax at the 20% rate (you exceed the personal allowance). The pension provider should sort it for you.

Where this falls down is if you have taxable income not covered by the UK PAYE system. For example my Father in law has a pension from his youth in Ireland. A form has to be submitted each year and the tax paid.

I'd also note that it may be possible to manipulate your taxable income. When I stop work I intend drawing a small enough pension to avoid tax. Topping up from ISA captal, until old enough that a combination of the state pension and a DB pension requires me to pay income tax.

Urbandreamer wrote:I'd also note that it may be possible to manipulate your taxable income. When I stop work I intend drawing a small enough pension to avoid tax. Topping up from ISA captal, until old enough that a combination of the state pension and a DB pension requires me to pay income tax.

Yes, that's what I do.

Using drawdown from a SIPP by UFPLS, a couple could have a combined annual income of £33,333 (currently) and pay no income tax whatsoever.

Scott.

Thanks all. It sounds more efficient and less hassle than I was expecting!

If you start taking UFPLS payments from a SIPP, does that commit you to continuing to take money by that method until the tax free element is exhausted? Or can you change your mind and take the remaining tax free element as a lump sum after, say, a couple of years of taking UFPLS withdrawls ?
Tried to get an answer to this, but couldn't find one online.

airbus330 wrote:If you start taking UFPLS payments from a SIPP, does that commit you to continuing to take money by that method until the tax free element is exhausted? Or can you change your mind and take the remaining tax free element as a lump sum after, say, a couple of years of taking UFPLS withdrawls ?
Tried to get an answer to this, but couldn't find one online.

No commitment at all. It just means that the remaining pot in your SIPP is not crystallised yet. You can crystallise all (or some) of it at any time.

(This is with AJBell Youinvest SIPP. The drawdown form you fill in lets you choose any of the above options.)

Scott.

I've been retired just over nine years, but won't be of state pension age for another year. I'm drawing a DB pension, which is below the personal allowance. I also have other taxable income which in itself is lower than the allowance but when combined with the DB pension means I have a modest amount of income tax to pay. I deal with this in about ten minutes each April through self assessment, and pay what's due later in the year.

I'm assuming (and hoping!) that when I receive my state pension, a similar arrangement will apply, because as neither pensions will be enough to breach my personal allowance I'm guessing that both will pay gross.

Or is it more complicated than that?

What happens with me is that one of my pensions is the primary one. This gets the personal allowance less a deduction for the state pension. My other pension is taxed at basic rate, because the first has used up all the remaining personal allowance. If my first two pensions had taken me into higher rate tax, then the third pension would be taxed at the higher rate.

I don't have much income outside tax shelters but, if I did, self assessment would take care of it. Were it predictable, the tax code on the second pension would probably be reduced to take it into consideration.

TJH

tjh290633 wrote:What happens with me is that one of my pensions is the primary one. This gets the personal allowance less a deduction for the state pension. My other pension is taxed at basic rate, because the first has used up all the remaining personal allowance. If my first two pensions had taken me into higher rate tax, then the third pension would be taxed at the higher rate.

I don't have much income outside tax shelters but, if I did, self assessment would take care of it. Were it predictable, the tax code on the second pension would probably be reduced to take it into consideration.

TJH

Thank you Terry.

So, is this right, using round numbers?

DB pension £10,000
State pension £8,000
Personal allowance £12500

So HMRC effectively reduce tax allowance by £8000 and give a code to DB pension provider of 450 rather than 1250?

staffordian wrote:

tjh290633 wrote:What happens with me is that one of my pensions is the primary one. This gets the personal allowance less a deduction for the state pension. My other pension is taxed at basic rate, because the first has used up all the remaining personal allowance. If my first two pensions had taken me into higher rate tax, then the third pension would be taxed at the higher rate.

I don't have much income outside tax shelters but, if I did, self assessment would take care of it. Were it predictable, the tax code on the second pension would probably be reduced to take it into consideration.

TJH

Thank you Terry.

So, is this right, using round numbers?

DB pension £10,000
State pension £8,000
Personal allowance £12500

So HMRC effectively reduce tax allowance by £8000 and give a code to DB pension provider of 450 rather than 1250?

Yes, that is how it is done. DWP tell HMRC how much state pension you will get, so you don't have to work it out.

TJH

Alaric wrote:

MrFoolish wrote:So how do you actually pay any tax you owe? Do the pensions companies do any of the work, like PAYE?

It runs under PAYE. A complication is when there are multiple sources of income, so it can need a little fine tuning on the tax codes to ensure that too much tax isn't deducted. It's a similar problem to anyone with multiple employments.

Yes but note that if the only pension you have is a state pension then there is no need for a PAYE code since no tax is withheld from a state pension.

In my situation I am deferring all pensions other than my state pension, and so do not use PAYE. I simply submit a self-assessment tax return once a year with a cheque for the amount I owe, based on an income of state pension, interest, dividends and capital gains.

Lootman wrote:

Alaric wrote: It runs under PAYE. A complication is when there are multiple sources of income, so it can need a little fine tuning on the tax codes to ensure that too much tax isn't deducted. It's a similar problem to anyone with multiple employments.

Yes but note that if the only pension you have is a state pension then there is no need for a PAYE code since no tax is withheld from a state pension.

In my situation I am deferring all pensions other than my state pension, and so do not use PAYE. I simply submit a self-assessment tax return once a year with a cheque for the amount I owe, based on an income of state pension, interest, dividends and capital gains.

I do exactly the same except I do not pay until well into January of the following year. The deadline for paying is 31 January, at least it is for me.

Dod

Mums experience with a civil service pension is hmrc are always doing the wrong tax codes and the pension jumps all over the place. Doing a SA is the only way to keep things straight

The main point missed in the above discussion is what happens if your total income exceeds the higher rate threshold (£50K). If it does you fall within self-assessment regime and you will need to fill a tax return. That's a hassle best avoided if you can live on £50,000 gross = £42,500 net (though that £50K can be greater if you make substantial charitable gifts or suck like).

FWIW I have several pensions (defined benefit x 2 + widowers x 2 + SIPP in drawdown). Provided I adjust the SIPP to ensure I keep within the £50K threshold then my 'prime' defined benefit pension gets all my allowances and the rest get a simple BR code and everything is simple with a yearly adjustment for exceptional items (e.g., charitable gifts, EIS, SIS). If I make the mistake of not making the adjustment in the SIPP income (as I did one year) I was served with a return and received special codes to collect 40% tax from 4 of my pensions and the devil of a job to get a repayment during the tax year.

Eb.

Eboli wrote:The main point missed in the above discussion is what happens if your total income exceeds the higher rate threshold (£50K). If it does you fall within self-assessment regime and you will need to fill a tax return. That's a hassle best avoided . .

I probably sound a bit strange here but I actually like the annual process of submitting a tax return. It is the one time in the year when I can check and confirm that I am paying the right amount of tax. Back when I was on PAYE (2001-2002) I never really understood how my tax was determined. It was like a black box.

But now the process of working through the return helps me better understand why I am paying the tax that I am paying. It also shows me where I can mitigate future tax liabilities. And forces me to look at my income streams for the previous year which gives me a sense of where I am adding value and where I am not.

As it happens I use an accountant but, even so, I know a lot more about my tax affairs than if I were merely being tossed about by tax codings and withholdings.

Lootman wrote:

Eboli wrote:The main point missed in the above discussion is what happens if your total income exceeds the higher rate threshold (£50K). If it does you fall within self-assessment regime and you will need to fill a tax return. That's a hassle best avoided . .

I probably sound a bit strange here but I actually like the annual process of submitting a tax return. It is the one time in the year when I can check and confirm that I am paying the right amount of tax...

Same here.

It's so straightforward and produces an instant answer. For me it confirms my maths and keeps me in control. I guess the prospect of it might be different for someone with a huge array of complex incomes, gains, foreign transactions etc, but in that case they would have no choice but to go down the SA route, so it's academic anyway...