Why does a pensioner reach the 40% tax band before £50k?

[KatyKopykat]

Can someone explain to me why a pensioner is taxed at 40% on income over £37700 when someone working is taxed at 40% on income over £50K? They have state pension, a workplace pension and a smaller workplace pension.

What am I missing?

Because they haven’t contacted HMRC to sort it out?

They don't. That's the amount over which you pay 40% AFTER the tax-free allowance of 12,570 is deducted (12,570 + 37,700 = 50,270).

Their state pension takes up just about all their personal allowance so all their income from workplace pensions are taxed at 20/40%.

I was going to say exactly this

Do they live in Scotland?

As above. And if for whatever reason you don’t have some/full state pension but your private pension is getting taxed the full amount as if you did then you need to speak to HMRC and get it corrected/claim a refund.

They don't live in Scotland to the poster above. They get full state pension, workplace pension 1 of about £19K and workplace pension 2 of roughly £6300. Not quite £37700. They also had a tax code change to recoup the winter fuel allowance.

That should all be taxed at 20% because it's about £25k so nowhere near the top of the £37k 20% band. Their state pension is roughly the same as the personal allowance so uses that up.

Or could they have a lot of savings (or other income like a rental property) that they haven't paid enough tax on the interest earned so they've lost their personal allowance?

Have they logged into their HMRC account and read through all the communications? How long is it since they know their tax affairs are correct - because of time it can take for things to catch up, sometimes there is an underpayment from previous years to account for.

No rental property or excessive savings. They have an ISA.

Can you see their coding notice as that should tell you how it's made up.

Do they do an online self assessment? If they do you get the full calculation and see exactly what you earn and what tax you pay. If they don't there may be something wrong and they should ring (or write to) HMRC and ask for an explanation. All of their savings are in ISAs? Building societies are obliged to give details of savings accounts to HMRC so if they have any savings outside ISAs that interest will be taxed.

It might be that their tax code isn't split across their two workplace pensions.

We'd need to see their tax code notices for each income source to have a proper idea.

You haven’t given us nearly enough information to tell you, and I know quite a lot about this.

So they should be paying tax at 20% as their income is below the higher rate threshold.