The calculation

You should now have the following amounts filled in on the calculations sheet:

• Interest on investments or savings
• Income from dividends
• Other income including pensions and earnings
• Full tax allowances
• Married couple's allowance
• Tax threshold

If your income added up from the first three boxes is higher than your tax threshold, then you will have to pay tax.

Work through the steps on the calculations sheet to find out how much tax you should have paid in 2008-09.

Tax on your pension

It is possible if you are a woman aged 60–64 that your tax allowances will not be enough to cover your State Retirement Pension, including the graduated, additional and extra pension you may have added on to the basic pension. So you could end up having to pay tax on your State Retirement Pension alone.

If your pension seems likely to exceed your tax allowances, then HM Revenue & Customs should send you a short self-assessment form. You will have to pay the tax in one installment. If that will cause you any hardship, write to your tax office.

Tax codes

Tax codes are a way of collecting the tax you have to pay from regular income such as earnings or a company or personal pension. But in some circumstances they are not accurate. So you may end up paying too little or too much tax during the tax year. If that happens, you can get your tax adjusted after the end of the tax year.

Top

If you have earnings or a company or personal pension, it will be taxed before you receive it. From April 2007 that also applies to retirement annuity contracts – which were like personal pensions you paid into before 1 July 1988. The income tax office issues a tax code for you so that the tax due can be calculated. You will be sent a copy of the Notice of Coding which shows how the tax code is calculated.

The tax code is worked out as follows. Your State Retirement Pension is deducted from your tax allowances to leave the amount of income you can have before paying any tax.

For example, your personal allowance may be £9,030 and your State Retirement Pension £105.25 a week or £5,473 a year. £9,030 minus £5,473 equals £3,557. So you can have £3,557 a year on top of your State Retirement Pension without paying tax.

This figure is converted to a tax code by knocking off the last figure, making 355. The code is used to calculate the tax due. In the case above, you'd pay tax on any amount above £3,559 (it is rounded up to the nearest '9').

Your code consists of numbers and letters: for example, the code above would be 355P. The letters listed below show the tax allowance you get:

L - Personal allowance under 65.

P - Personal age-related allowance aged 65–74.

V - Age-related allowance and full married couple’s allowance, both under 75 and tax due at basic rate.

Y - Personal allowance aged 75 or more.

T - None of these codes describes your circumstances or you
have asked the tax office to keep your tax code letter secret.

K - Is placed before the code number and means your state
benefits come to more than your tax-free allowances so your
company pension is taxed at a higher rate to ensure that the
tax due on the State Retirement Pension is collected.

If you are entitled to the married couple's allowance, your tax code will be adjusted by a small amount to ensure that the correct amount of tax is deducted using tax codes. This adjustment may well give the wrong result. So it is important that anyone who gets the married couple’s allowance, and has a tax code, checks that the correct tax has been deducted at the end of the year.

It is also important to check that the amount deducted for your State Retirement Pension is accurate – it may not be.

If you were born between 6 April 1943 and 5 April 1944, you are old enough to get the age-related allowance for the whole of 2008–09. However, HM Revenue & Customs will not apply it from the start of the tax year unless you ask them. Contact your tax office at once if this applies to you.

If you think you have paid too much tax through PAYE, wait for your end of tax year P60 from your employer or pension provider. That should show your income and how much you have paid in the tax year. Send a copy of that to your tax office explaining what you think is wrong. Alternatively, contact one of the organisations listed in section 9.

You can find out more about tax codes from
http://www.hmrc.gov.uk/pensioners/tmatax-codes.shtml