4 min Read
16 Feb 2012

Written by Damien

Damien is one of the most widely quoted money and investment experts in the national press and has made numerous radio & TV appearances. He created MoneytotheMasses.com while working in the City when he became disillusioned with the way the public were left to fend for themselves because they could not afford financial advice.

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Reader Q: Will it be worth continuing to work now I can claim my State Pension? How much tax will I pay?

Get an answer to your financial question onlineReader Question:

Hi Damien

I have just started getting my state pension and want to carry on working but have just got my new tax code for April 2011 to 2012 which is 44l. I work full time and my weekly income before tax is £235.90 and my weekly pension now is £136.44 rising to £143.52 in April. I was widowed very young so never received widows pension.  Will it be worth my time to continue working and how much tax will I pay?

Thank you

 

My response:

Hi

First of all I assume you mean your new tax code for April 2012 to April 2013? For those who don't know the Basic State Pension is taxable. However, tax is not deducted at source.

Instead, if you are earning an income under PAYE, your tax code is adjusted so that you pay more tax on this income, while no tax is due on your state pension. It is easier this way otherwise you would have to complete a tax return. In practice by changing your tax code HMRC are in fact reducing your personal allowance by the amount of your state pension (which you don't have to pay any tax on). The net result is the same as paying tax on the whole lot while maintaining a full personal allowance but it is administratively easier via PAYE for all involved, including you.

How did they arrive at your tax code?

So in your case, assuming you are under 65, your personal allowance would normally be £8,105 for 2012/13. But HMRC then subtract your state pension to give you the personal allowance applied to your employment income. To work out your tax code you just divide this number by ten to give you the numerical part of your PAYE code.  So the long and short of all this is that what your tax code is saying is that you can earn £440 next year without paying tax (remember your state pension will be tax-free). Obviously,  I can't quite replicate your tax code with my calculation but that doesn't mean the code is wrong - if you are unsure check with HMRC.

How much tax you will have to pay

So if you want to work out the tax you will pay next year you can use this handy PAYE tax calculator. But to give you an idea, your net take home weekly pay from your job will be £190.45 (don't forget you no longer pay national insurance when you start collecting your state pension).  Then add on your state pension of £143.52 gives a total of £333.97.

If you didn't claim your state pension and just carried on working your net weekly take home pay would be £219.89.

As to whether it is worth carrying on working only you can decide that.

 

I hope that helps.

Damien


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