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.

Working out your tax is quite tricky and you may need to use a calculator. This calculation only works if your total income is less than £43, 875 a year. If it is more than that you will have to pay tax at 40p in the pound on the excess and some extra tax on any dividends you get.

Work through the steps on the calculations sheet to find out how much tax you should have paid in 2009-10.

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.

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If you have earnings or a company or personal pension, it will be taxed before you receive it. From April 2007 that has also applied 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 £9,490 and your State Retirement Pension £110.10 a week or £5,725.20 a year. £9,490 minus £5,725.20 equals £3,764.80. So you can have £3,764.80 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 376. The code is used to calculate the tax due. In the case above, you'd pay tax on any amount above £3,769 (it is rounded up to the nearest '9').

Your code consists of numbers and letters: for example, the code above would be 376P. The letters listed below show the tax allowance you get:

L - Personal allowance under 65.

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

V - This code will not be used as from the 2009-10 tax year. If you had a V tax code in 2008-09 you will have been told that your code has changed. If you are still married it should now end in 'T'. Make sure you get the higher rate allowance for those over 75 and the married couple's allowance.

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 when your other income which has not been taxed, such as your State Retirement Pension, exceeds your allowance.

If you are entitled to the married couple's allowance, your tax code will be adjusted to try 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 1944 and 5 April 1945, you are old enough to get the age-related allowance for the whole of 2009–10. 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/incometax/codes-basic.htm