DM pension and increased tax

[colinthecaterpillar45]

DM works part time 4 days a week in a shop. She turned 66 this year and now gets her state pension which she was putting directly into a savings account via standing order.

Because she is now getting paid her pension she is getting taxed more on her wages and her income has gone from around £1000 a month to £800-and something because her tax has increased.

She doesn't want to spend her pension yet and wants to save it while she is still working as she will eventually need to live on just that. She is single.

Money has always been a worry for her, and I worry endlessly about her financial situation, but I am not very good with understanding finances and tax etc. so I feel a bit lost with how to advise her on the best things to do.

Would she be better off reducing her hours down to 3 days a week? Or is there something else she can do so she doesn't get stung with the higher tax?

Thanks in advance x

And another question!

Aside from Citizen's Advice, where could we go to get financial advice? We would be happy to pay but I'm just not sure where to start!

Your DM could have deferred her state pension for a year or more & HMRC would have added some more.
However, if she is already claiming her state pension, I don't think she can defer it now

Lay out the figures and I'll help you.

What is her gross income from her job per month? Her income before tax in her payslip?

How much pension is she receiving per month?

I don’t see that reducing her hours would ever give her more money if her tax code is correct. Yes she’s taxed on her salary income, but never more the income itself.

To have a take home of £1000 sounds like she was earning approx £12500 a year, so pretty much zero tax, as £12500 is the basic rate tax threshold.

As she now has an income of approx £21850 (assuming full “new” state pension) she’ll have approx £155 tax to pay, plus approx £30 NI (no NI on the pension). So that fits with the £800+ that you mention. But… that’s me assuming she gets a full new state pension. So first thing to do, is make sure her tax is correct.

Reducing her hours won’t increase her money - just increase the amount per hour she has take home.

She could look a paying into a pension!
She could set up a private pension and pay in £2880 per year. That will be topped up automatically by tax relief to £3600, which is allowed under 75.

So she could take £1800 out of her state pension each year to top up her “missing” months of £150 a month tax payments.

But at the same time, pay £2880 into a private pension and have it topped up to £3600, gaining back £720 of it.

That figure of £2880 is the maximum that a non tax payer can pay in, but you’d have to check it’s still OK in her earnings situation.

There are rules about “pension recycling” but as she’s still earning I think it would be fine.

Of course, once in the private pension it becomes taxable once drawn out. But… the first 25% of each withdrawal is tax free, and her state pension plus the rest would be under the £12500 tax threshold - once she stops earning.

Definitely check it out in more detail don’t rely on what I’ve said… a great place to check with those more expert than me is the pension forum on moneysavingexpert. The £2880 > £3600 is really well known, so you should easily get an answer there!

Yes, use surplus money to make new pension contributions and the tax relief gained will help offset the income tax being taken.

Forgetting about national insurance and using rounded numbers to keep it simple, she was earning £12,000 per year (£1,000 per month) and now also has a pension (say £9,000 per year).

Before:

Salary £12,000, Income Tax 0, Take Home £12,000

Now:

Salary £12,000, Income Tax £1,800, Take Home £10,200
Pension £9,000, so total is £19,200

Because the pension pushed her total income over the nil tax threshold, she pays 20% tax on the extra income.

If she reduces her hours to earn £1,000 less, her tax will reduce by £200 and her income by £800. If money is tight this isn't he answer. As was posted above, she could open a private pension and shield some of the money from tax. Otherwise, it's just the nature of tax that once you're past the tax-free threshold you have to earn £1,000 to get £800 in your pocket.

The saying that there is never an escape from death or taxes

( thinking about all the tax that I've paid so far & ongoing)

You stop being liable for NI once you reach the retirement age.

@Lincslady53

You stop being liable for NI once you reach the retirement age.

That applies to earned income. You don’t pay NI on pension income at any age @Lincslady53

The new 1.25% NI levy will be paid on all earned income, including income of people who work beyond retirement age. It's also charged on dividend income, but not pension income.

Her income is now £19,000 and that means she's going to have to pay some tax. Unavoidable. If she reduces her income she will pay a little less tax but take a lot less money home.

I take it she's got no pension other than the state pension?

Hello everyone. Just wanted to come back and say thank you for all the replies, we actually had a bit of a health scare with DM so her money worries took a back seat for a moment but thankfully it was a false alarm and she is fine

Need to read through everything now! @gorgeousbimbam do you mind if I PM you?

Pensionwise is the govt’s free advice service that will offer advice around this. I would contact them.

www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise