Tax codes

[Sprog1]

Morning All,
Thinking about my retirement plans again.
A little assistance on tax codes please.
Salary currently £50K on a code of 1257L

I may continue working full time and take a DB pension of £20K
Salary of £50K will be taxed at 1257L
Pension will be taxed on code D1 all at 40%

Have I got this correct?

How will tax codes be applied if I take the DB pension and contribute Salary Sacrifice £30K to a new pension.
Does the pension remain at D1 or drop to BR

Thanks

[DrFfybes]

I may continue working full time and take a DB pension of £20K
Salary of £50K will be taxed at 1257L
Pension will be taxed on code D1 all at 40%

Have I got this correct?

IF your salary is already into 40% then you should be correct.

In MrsF's case her salary is below the 40% threshold, but her pension takes her over. Her entire tax code is applied against her salary, and all her Pension is taxed at 20%, and we do a tax return for the excess. Last time I had to contact them as we used a SIPP to bring her under the £50,271 threshold (after incuding divi and interest income) and they didn't apply the SIPPd amount to increase the 40% limit. This year we upped her SSAVC instead which is fine as HMRC never see the salary as taxable in the first place.

Note - is your job is in a different pension scheme to the one you are taking benefits from? - many DB schemes have limits on returning to the same employment for more than 50% of time for a period after taking benefits.

How will tax codes be applied if I take the DB pension and contribute Salary Sacrifice £30K to a new pension.
Does the pension remain at D1 or drop to BR

In MrsF's case the tax codes were applied dynamically - that is they sent a new one every few weeks until they thought they had it sorted, mainly as they adjusted it to try to take into account the SIPP paymentns (which we'd stopped) and then for the first time in 40 years added her professional body registrationfees into the calculation. But seriously, if you go down this route then unless you contact them and tell them your plan, you will probably keep the same tax regime on the DB income until you submit your tax return, whereupon the DB income at least will be taxed at BR.

There is one massive advantage of the SSAVC into the new scheme. Going in it attracts 20% tax relief and 12% NI, but then ALSO you reclaim/pay 20% less tax on the corresponding DB income, making your contributions £48 for every £100 that goes in

Paul

[DeepSporran]

..
Pension will be taxed on code D1 all at 40%

..

As I understand it code D1 would imply additional rate of 45%. I think you mean code D0 for higher rate at 40%. Unless there’s a lot of extra money coming in you haven’t mentioned that takes total income to over £125140 ?

[Sprog1]

Thank You
D0 is correct. My heads mince with all this stuff!!

[DrFfybes]

Thank You
D0 is correct. My heads mince with all this stuff!!

Assuming you have sufficient free cash (and you probably will, I guess there will be some Lump Sum with the DB scheme?) it might be better to focus on the other issues and let the details of tax situation sort itself out with a Return at year end.

Worst case is you pay £8k tax on the DB rather than £4k and have to wait to get it back. If you lose 6 months' interest at 5%pa then that's £60 after tax.

Paul

[mc2fool]

Morning All,
Thinking about my retirement plans again.
A little assistance on tax codes please.
Salary currently £50K on a code of 1257L

I may continue working full time and take a DB pension of £20K
Salary of £50K will be taxed at 1257L
Pension will be taxed on code D1 all at 40%

Have I got this correct?

How will tax codes be applied if I take the DB pension and contribute Salary Sacrifice £30K to a new pension.
Does the pension remain at D1 or drop to BR

Thanks

I can't on a quick google find evidence to support it but I believe that HMRC likes to consider income as eligible for tax in "slices", with the order being state pension, private pension, earned income, other income, and those going from using the personal allowance up through the marginal rates.

It doesn't make any difference to the end total, but in your example you might find you end up with tax codes set such that you have the first £12,570 of your DB pension taking up the personal allowance then the rest of it being taxed at 20%, and then your salary up to the HRT threshold at 20% and that above it at 40%.