Martin Lewis explains ‘complex’ tax codes
We use your sign-up to provide content in ways you’ve consented to and to improve our understanding of you. This may include adverts from us and 3rd parties based on our understanding. You can unsubscribe at any time. More info
Age UK highlighted that one of the top 10 common tax mistakes people make is forgetting to tell HMRC that they are about to retire. This is especially vital for people who are self-employed.
HMRC is responsible for sorting and allocating tax codes to each Briton both in work and in retirement, ensuring that they pay the correct amount of tax for their circumstances.
However, the onus is on the public to double check their tax code is correct, and many errors can occur in the system.
Some of these mistakes can see Britons overpaying or underpaying their taxes, both of which can have disastrous consequences for their finances as this man realised.
Tax codes outline how much an employer or pension provider should be taken for tax purposes from a person’s wages or pension.
In certain circumstances it is vital that HMRC is notified when a person is planning to retire in order to assign the correct tax code to their retirement income.
And just like errors with one’s tax codes during employment, mistakes can be made for their pension tax codes as well, making it vital that Britons check they are correct.
David Woodward, managing director of Woodward Financials, told Express.co.uk this is particularly prevalent for the self-employed and those wanting to retire early.
He shared: “If you are considering stopping work before your state pension age, this may affect your state pension as your state pension depends on how many qualifying years of National Insurance contributions you have made.
“When approaching retirement, it is always a good idea to request a BR19 state pension forecast which can be done online.
“Your pension provider is likely to inform HMRC when you start taking pension benefits but don’t expect your employer to do this on your behalf.
“Most employers will just issue a P45 once leaving the company as many people may continue to work in a reduced capacity with another employer in later life.”
People with more than one pension, aside from the state pension, may find they have a few more technicalities to deal with as each pension requires its own tax code.
Those with more than one pension should check each of their pension incomes to ensure it has been allocated the correct tax code.
People will also need to check all of the codes together as combined they may provide them with too many or too few allowances.
Mr Woodward cautioned that people who are self-employed must always contact HMRC when they are planning to retire.
He continued: “Most pension providers will contact you 12 months before your planned retirement age, this could be with a retirement pack detailing your options or it may be a letter requesting what your intentions are likely to be when you reach your stated retirement age, normally set when you took out the pension.
“It is however advisable to inform HMRC if you retire so that your tax code in retirement reflects your retirement status.
“Especially if you were a high rate or higher rate taxpayer, this would avoid any undue tax from being paid as well as the need to carry out a self-assessment.”
Regardless of how many pension income sources they have, a person’s workplace or personal pension providers will take off the tax for them.
However, those who only receive state pension will be responsible for paying any tax owed on the income.
Source: Read Full Article