STATE PENSION income makes up a significant portion of retirement funds for many. The payment can be claimed while continuing to work, should one wish, but how does this affect tax codes?
A tax code is what is used by an employer or pension provider in order to determine how much Income Tax needs to be taken from a person’s pay or pension. The tax code itself is determined by HM Revenue and Customs (HMRC), who tells the employer or pension provider which code to use in order to collect the right tax.
Currently, 1250L is the tax code currently used for most people who have one job or pension.
However, there is a whole host of reasons as to why a person may have a different tax code.
Among them may be those who have decided to claim their state pension while continuing to work.
There is no set retirement age, meaning once a person has reached state pension age, they can opt to receive the state pension while remaining working, should they wish to.
And, the same may go for some who have private pension savings but don’t wish to retire just yet.
So, what happens to the tax codes of those who are in this posotion?
Tony Mills, Director at Uniform Tax Rebate, shared some insight into the matter.
“When you claim pensions and continue to work, you’re taxed on the combination of your earnings and your pension,” he told Express.co.uk.
“HRMC will give you a personalised tax code because it’s similar to working two jobs.
“Depending on your combined income from state pensions and work, HMRC will usually leave your tax allowance on your main source of income.
“The tax code will show BR (20 percent), D0 (40 percent) or D1 (45 percent) on your secondary source income, depending on the amount of income coming in.
“This also applies if you’re not retired and working more than one job.”
Income Tax is a tax which needs to be paid on certain types of income – but not all income will be subject to the tax.
How much Income Tax a person pays in each tax year depends on how much of their income is above the Personal Allowance, as well as how much income falls within each band.
It’s also important to bear in mind that some income is tax-free.
In England, Wales and Northern Ireland, the current Income Tax rates and bands are as follows.
The Personal Allowance covers taxable income up to £12,500.
Any taxable income in this band is charged at a zero percent tax rate.
The basic rate covers taxable income between £12,501 to £50,000 in the tax year.
This basic rate is charged at a 20 percent tax rate.
Higher rate taxpayers – meaning those with taxable income of between £50,001 to £150,000 in the tax year- will see taxable income in this band apply at a 40 percent tax year.
The Additional rate applies to taxable income of more than £150,000, and this is charged at 45 percent.