Income Tax issues
When you leave your job there are a number of tax issues which you may need to check. These notes are a guide to the main questions but you should always check with your employer, pension administration department or tax office to get definitive answers.
How tax is calculated
The tax year runs from 6 April to 5 April. Everyone is taxed as an individual with their own allowances. The allowances are not transferable.
Your individual income from all sources is added together to give your total (gross) income. First any pension contributions are deducted and then the income tax allowances as stated in your Tax Code notice are deducted from that figure to leave your Taxable Income. Income tax is payable on the Taxable income at the rates of tax applicable in the tax year.
Link to the Inland Revenue website.
The amount of tax your employer or pension provider deducts from your salary or pension is determined by your tax code. This is issued every year and shows your allowances and any deductions which apply.
Your Notice of Coding lists all the taxable items which cannot be taxed at source (your taxable benefits). They will include any taxable benefits you have been receiving in your job, a company car and/or fuel benefit, health insurance etc. They will also include any tax unpaid for the last year and an Allowance Restriction if you receive the Married Couples Allowance (this was abolished in April 2000 but people who were 65 at that time may still
The deductions are also listed and are taken from the allowances. The resulting figure (less the last digit) is the tax code which will be applied to your income. The letter denotes certain categories of taxpayer and does not affect the amount of tax you pay. The code number (with the last digit added back on) is the amount of income you can receive before any tax is due.
The Inland Revenue estimate your tax allowances, and hence your tax code, on the basis of your earnings in the previous tax year. If your circumstances change, because you have left your job, retired or lost a taxable benefit or you have reached 65 your code may need to change, it is advisable to check with your tax office that your allowances are correct.
Taxable benefits cease on the day you no longer receive the benefit, normally this will be on the day you leave. Your code should change as from that day. When you leave, your company will usually inform the Inland Revenue but it does no harm to double check yourself by phoning your tax office.
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When you leave a job you would normally receive a P45. It would be passed on to a new employer and the employer would apply the tax information to your new salary. If you leave and take a pension, the P45 goes directly to the pension provider, they become your 'employer'. If you take another job, the pension provider can send a P45 so that the employer can apply the correct tax code to your salary.
If you are taking a pension you will be given a page from the P45. This is for your own tax records and it should not be given to an employer.
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The tax you pay each month is one twelfth of the total tax due on your yearly taxable income (salary less allowances). If you leave, for instance, in September, and take an immediate pension of, say one third salary, then your total income for the year will be reduced and the total tax liability will be less. You will have paid one twelfth of a higher amount for the first six months. The difference between what you have paid and what you should pay is normally rebated to you in your first or second pension payment.
If you do not take a pension you may ask for the rebate to be paid to you. If you get a job and give the employer your P45 any rebate would be in your first salary payment.
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Taxation of redundancy/severance payments
Redundancy payments up to £30000 are normally paid free of tax. The total payment your receive may be made up of different components, eg payment in lieu of notice, statutory redundancy payments etc. There may be complications with some types of payment eg. 'ex-gratia' payments - check with your payroll department on your tax position if necessary.
Any payment in excess of £30000 is added to your income for the tax year. Note that this might take you into a higher tax bracket for the year which would mean that you may have excess tax to pay on savings interest and dividends.
Pension commuted to cash
Cash lump sums commuted from pension schemes are not taxable. They are not added to income or to redundancy payments for tax purposes.
The interest earned on the sums is, of course, part of taxable income.
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Tax on company and personal pensions
If you have just been receiving a salary your tax allowances have been set against the salary and tax deducted accordingly. Your pension provider effectively becomes your new 'employer' and will deduct tax from your pension in the same way as your salary.
Tax and your State Pension
When you reach State Pension age and you receive your State Retirement Pension it will not be taxed at source. It is taxable, however, and the tax due on it will be taken from your company pension.
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Reducing your Income Tax liability
There are a number of ways of ensuring that you do not pay tax unnecessarily. As your circumstances change, your tax situation may alter as well and a check could reveal areas where tax savings could be made.
If you are married or have a civil partner whose total income is below the Personal Allowance, consider transferring assets which produce income between you and your spouse/partner in order to reduce income tax liability.(Note, if you are not married or in a Civil Partnership, there may be a Capital Gains Tax liability if you transfer assets).
A transferable allowance is available to married couples and civil partners who are not in receipt of married couple's allowance. A spouse or civil partner who is not liable to income tax or not liable to higher or additional rate can transfer an amount of their personal allowance to their spouse or partner as long as they are not higher rate tax payers.
If you have overpaid income tax for any reason in previous years, you can submit form R40 to the Inland Revenue for repayment, up to six years back.
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