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Sam
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Hi I have, since sept, taken my state pension of £628 per

Resolved Question:

Hi
I have, since sept, taken my state pension of £628 per month whilst continuing to work part time. On doing so, my tax code was changed from 1003L to 185L.
My monthly income tax has since been much greater than before - with a longer working week but no pension. This has meant that, for example for this month, my employer has deducted £1558.12 in tax from a gross salary of £2526.75.
My latest pay slip lists under 'totals to date' that pensionable pay is £27870.40, taxable pay is £24866.25 and that tax paid is £5451.73.
I have contacted the inland revenue but was unable to understand the explanation given for such a large income tax deduction.
Can you help me please?
Many thanks
Submitted: 2 years ago.
Category: Tax
Expert:  Sam replied 2 years ago.
Hi
Thanks for your question. I am Sam and I am one of the UK tax experts here on Just Answer.
I would expect you to now pay at least an extra £135 a month in tax as a result of your state pension having commenced.
Can you advise if £2526 gross salary is your normal wage - and if this was the first month that the employer used the change of tax code.
Can you also advise whether the tax code 185L has an X or a Month 1 marked by it (either from the P2 change of tax code or your payslip)
I think I know what has happened but I want to check those points I have raised first.
Thanks
Sam
Customer: replied 2 years ago.

Hi

Yes that is my normal monthly basic pay from September which was the first month of the new tax code (presumably because tax office had informed employer about taking state pension? ).

My oct salary contained an additional payment for extra hours worked in Aug. Prior to september 2014, from sept 2013 up to August 2014, my Basic Monthly pay was £3389.25 (with occasional extra payments for additional hours).

The tax code does not have an X but payslip shows 'period 8' for November.

Hope that is clear!

Expert:  Sam replied 2 years ago.
Hi
Thanks for your response and the additional information
When state pension begins HMRC include a whole years worth into the tax code, so that the tax payments taken from any future income is accurate. So HMRC have included this whole year figure and issued the new tax code P6 to the employer and P2 to you (yours shows why the tax code has changed whilst the employer just gets the final tax code 185L with no reason as to why it would have changed)
However they should issue this on a Month 1 basis so its only starts to take the right tax from the date its first operated. Instead this has been issued on a cumulative basis - let me show you what I mean with this example
New tax year begins 06/04/2014 - Tax code 1000L Cumulative basis
Month 1 Pay 1833 1/12th of code 1000L allows £833 tax free so tax due on £1000 x 20% = £200
Month 2 Pay 1833 so total pay to date £3666 2/12ths of code 100L - allows £1666 tax free - so tax due on £2000 x 20% = £400.00 less the £200 paid at Month 1 - tax due Month 2 £200
Then at Month 3 - the code suddenly drops to 200L
If issued on a Month 1 basis, then
Month 3 Pay £1833 1/12th of code 200L allows £166 tax free so tax due on £1667 x 20% = £333.40
Month 3 Total pay £ 5499 and total tax £733.40
Month 4 Pay £1833 1/12th of code 200L allows ££166 tax free so tax due on £1667 x 20% =£333.40
Month 4 Total Pay £7332 Total Tax £1066.80
BUT if the code was left on a cumulative basis which has happened to you, then whilst Month 1 and 2 would remain the same this is what would happen at Month 3 and 4
Month 1 Pay 1833 1/12th of code 1000L allows £833 tax free so tax due on £1000 x 20% = £200
Month 2 Pay 1833 so total pay to date £3666 2/12ths of code 100L - allows £1666 tax free - so tax due on £2000 x 20% = £400.00 less the £200 paid at Month 1 - tax due Month 2 £200
Then at Month 3 - the code suddenly drops to 200L cumulative basis
Month 3 Pay £1833 so total pay to date £5499 3/12ths of code 200L allows £499 tax free - so tax due on £5000 x 20% = £1000 less tax paid at Month 1 and 2 £400 - tax due Month 3 £600
Month 4 Pay £1833 so total pay to date £7332 4/12ths of code 200L allows £666 tax free - so tax due on £6666 x 20% = £1333.20 less tax paid Month 1 2 and 3 - £1000 - tax due Month 4 £333.20
So you can see Month 3 when the code is left on a cumulative basis produces a higher deduction of tax.
HMRC are at fault first and foremost as they SHOULD have issued this tax code on a Month 1 basis - but your employer payroll team clearly have also made an error in not realising that such a drop in your tax code which remained on a cumulative basis was going to claw back the excess tax - which I might add isn't even due - as you did not have state pension from April to August!
They could have used reasonable judgement (as per the Employer guide) to just add Month 1 basis to the code, or at least phone HMRC to ask if this was acceptable if they felt unqualified to make this decision.
So the reason for the huge tax deductions are
1) The reduced code was operated cumulatively and
2) You are a higher rate taxpayer - so some of the excess tax suffered was at 40%
I would suggest you go back to your payroll and see if they would be willing to rerun the payroll putting that tax code on a Month 1 basis - if they are unable then I would see if they can assist you in any other way - such as recalculating it manually and paying your the difference between what the manual calculation states is due and what they actually deducted - and then just report this through the following months payroll as a tax free payment to you (so the books/payroll balance.
Let me know if I can be of any further assistance
Thanks
Sam
Customer: replied 2 years ago.

thank you for your reply. I am not very clear on your figures (sorry might lack of understanding not your explanation!) but I am sure that your comments will be understood by those who need to act upon them!

I am assuming that it is possible to print a copy of your reply and advice from this e mail and present it to my payroll dept?

Expert:  Sam replied 2 years ago.
Hi
Thanks for your response and I know its a lot to absorb and remember I haven't used your figures, I tried to make it simpler ?!? (its not a simple subject to explain! but the key focus should be each of the Month 3 positions and how the tax deducted differs) but your payroll dept will be able to follow the gist and certainly would (I hope) know the impact on a reducing of the tax code, used on a cumulative basis when clearly Month 1 should have been applied.
If you open up the full thread of the question through "MY Questions" by logging on and selecting this tab from the top right, then you can print the whole thread off. Failing that copy and paste into a word document!
Any further question do please come back, but if you would be kind enough to rate the level of service I have provided, it would be much appreciated, as this ensures Just Answer credit me for my time.
Thanks
Sam
Customer: replied 2 years ago.

Will do. Many thanks!

Expert:  Sam replied 2 years ago.
You are very welcome
Thanks
Sam
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