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TonyTax
TonyTax, Tax Consultant
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I am hoping to retire shortly after my 60th birthday which

Resolved Question:

I am hoping to retire shortly after my 60th birthday which falls in July 2015. I will have two pensions - a military pension (about £33k) which I am already drawing and a local government pension (about £7k) which I can draw any time after my 60th birthday. The conbination of my current salary (about £58k) and my military pension puts me firmly into the 40% tax bracket but, after retirement, my total pensions will amount to about £40k (without including my state pension which will not be payable until I reach 66).

My tax codes for next year will be based on my salary and miltary pension income, so what happens if I want to retire about half way through the tax year - will all my pension be taxed at the higher rate for the rest of the tax year and, if so, would I be better off aiming to retire at the end of the tax year in which I reach 60 (ie at the beginning of April 2016)?
Submitted: 3 years ago.
Category: Tax
Expert:  TonyTax replied 3 years ago.
Hi.

You have to remember that the top tax rate is 45% so at that level you keep £55 out of every £100 of income you have above £150,000. If you defer your retirement to April 2016, you will have lost out on the pension you would have received between July 2015 and April 2016 had you taken it in July 2015.

If you retire at the end of July 2015, your salary for the period April 2015 to the end of July 2015 will be about £19,333 (£58,000 / 12 x 4). Added to your pension income of about £40,000, your total income in 2015/16 will be about £59,333. The point at which you will start to pay tax at 40% in 2015/16 will be at an income level of £42,285. The first £10,000 will be tax free as the personal allowance will be at least £10,000. So, around £17,048 of your 2015/16 income will be taxed at 40%.

The tax codes that will be operated against your pensions if you retire in July 2015 will be structured in such a way as to smooth the tax deductions over the whole tax year and will take account of the fact that you will not have a salary for 2015/16 of £58,000 but £19,333 instead. The PAYE system operates in such a way as to give you an increasing proportion of your personal allowances as the tax year progresses. The same applies to the tax bands. The cumulative amounts taxable at each rate, 20% and 40% in your case, increase as the tax year progresses.

If you retire in April 2015, you should contact the tax office on the number here at that time to have all your tax codes reviewed in the light of your retirement which will cause less of your pension income to be taxed at 40% and some of your personal allowances to be available to use against your pensions too. So, while you won't have your £58,000 salary any longer, your net pension income will increase as result of more of the 20% tax band being available to use against your pensions.

Whilst it is ultimately a personal choice, if you wait until April 2016 to retire, at the start of a new tax year, it will be a more straightforward process for the tax office to allocate all your personal allowance against your largest pension and to calculate a tax code for your other pension which I would expect to be BR (20%) if your income in 2016/17 will be around £40,000. However, you will still need to contact the tax office to have this done or there will be a delay in getting the tax codes right.

I hope this helps but let me know if you have any further questions.
Customer: replied 3 years ago.

Thanks for that. I am not quite sure of the relevance of the first sentence of your reply since I have no expectation of an income over £150k. Also, I was a bit confused by the first line of Para 4 - referring to retirement in April 2015. I assume that you mean April 2016, as per my question.


 


Apart from these two points, I think your answer is clear, but I would be grateful if you could clarify these two points before I rate the reply.


Expert:  TonyTax replied 3 years ago.
I mentioned the 45% tax rate as that is the top income tax rate, ie the top tax rate is not 100%. The point I was trying to make was that if you give up income to save tax you are still out of pocket in cash terms.

The date in paragraph 4 should have read "July 2015". My apologies for the typing error. The next paragraph deals with an April 2016 retirement.
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