I CURRENTLY receive £15,000 per year from two sources, my state pension and my school teacher's pension. I am aged 72 and married. According to HM Revenue and Customs, my income tax liability is just over £50 per month and I have received a tax code of 427V for this year.
However, when I entered my details and income into an income tax calculator on the internet, it calculated that my monthly tax liability was £9.71. I would be grateful if you could confirm if HM Revenue and Customs are overcharging me or if the internet site is incorrect?
Fergus Hughes, Fife.
Valerie Smart, head of private clients, PricewaterhouseCoopers LLP writes:
In this situation HM Revenue & Customs are correct. As you are aged 72 and are married you are entitled to two income
tax reliefs.
Firstly you are entitled to an annual age allowance of £7,550 as you are aged between 65 and 74 on April 5, 2008. Be aware though, if you receive more than £20,900 of
taxable income the age allowance is reduced by £1 for every £2 of income over this amount down to the normal
personal allowance, currently £5,225.
In your situation, the full age allowance will be deducted from your £15,000 income leaving you with income subject to tax of £7,450. The first £2,230 of income will be taxed at 10% and the remaining £5,220 will be taxed at 22%. Before taking account of the relief detailed below, your income tax liability for the year will be £1,371.40.
The second relief you will be entitled to is the married couple's allowance as you were born before April 6, 1935. This allowance is known as a tax reducer as it reduces the amount of tax you actually owe in the year.
In your situation you are entitled to a married couple's allowance of £6,285. This amount is multiplied by 10% to give £628.50 and deducted from your liability of £1,371.40. Your income tax liability for the year is therefore £742.90 or £61.91 per month.
This question highlights the importance of not relying on internet sites to calculate your tax liability. The internet site incorrectly deducted the annual age allowance of £7,550 and the married couple's allowance of £6,285 from your total income of £15,000. This left you with income subject to tax of £1,165 which was then taxed at 10% leaving you with an income tax liability of £116.50 or £9.71 per month.
The tax code you receive from HM Revenue & Customs will be used by your pension providers to withhold the correct amount of tax on your behalf. It is important that you check that your code is correct whenever you receive a new one for this reason.
The facts about 'company Isas'
LAST week in your article "When it pays not to have a pension", Scottish Friendly's Neil Lovatt said: "Any staff without access to a company Isa into which their employer is prepared to pay should be lobbying for one." But as I understand the Isa rules, only individuals can pay into an Isa, and there is no such thing as a company Isa.
Name and address supplied.
Tom McPhail, head of Pensions Research, Hargreaves Lansdown writes:
You are right to an extent in that employers cannot directly pay into an ISA on behalf of an employee, unlike pensions which have established tax breaks to encourage employers to pay money in on their employees' behalf.
However, what they can do is facilitate employee savings by deducting an agreed amount from the employee's net pay, and paying it into a savings plan.
What we have seen more recently is employers facilitating ISAs and Sipps in conjunction with employee share-save schemes. This allows employees who have been able to use tax advantaged schemes to buy shares in their employer to then roll the shares over into either an ISA or a pension.
