Tony Hazell, Money Mail's financial problem solver, says: I was going to say there is a simple explanation — and there is. But then when I considered your tax affairs I quickly realised why so many pensioners get confused and end up paying too much or too little tax.
Let’s start with the basic answer. The state pension is taxable, although it is paid without tax being deducted. This makes life easy for non-taxpayers but can create a headache for those who have other pensions or do paid work.
In order to put your affairs straight, HM Revenue & Customs must, if your income is high enough, adjust your tax code and take extra tax from another pension or an employer.
Here’s how it works in your case. As a pensioner aged 65, you would have a personal allowance of £10,500 this tax year (April 6, 2102 to April 5, 2013). Your total state pension is £7,103.52 a year (that is £591.96 times 12). HMRC would use this to reduce your personal allowance to £3,397.So, only the first £3,397 of your Prison Service pension will be tax-free.
The remainder will be taxed at 20 per cent.
More... ASK THE EXPERTS: Can I get a refund for tax I overpaid in 2002? Retirees pay out 29% of their income in tax while poorest pay up to 42% Should pensioners make enjoying retirement a priority above leaving an inheritance for the kids?If your Prison Service pension is £994 a month before tax and your state pension is £591.96, then your total tax bill should be about £1,706 a year, or £142 a month.
Incidentally, as you turned 65 in February your personal allowance should have been £9,940 for the 2011/12 tax year. If HMRC or the Prison Service was not aware of this significant birthday you may have paid too much tax that year.
Dig out your Coding Notice to check. This could open the door to a further rebate. If your income from pensions was less than £12,500 in the 2011/12 tax year, you are eligible to pay tax at just 10 per cent on at least some of the interest from any bank or building societies savings you have.
This is because the first portion of taxable income (£2,560 in that tax year) was taxable at a lower rate of 10 per cent, if and only if, that income came from savings interest rather than pensions or wages.This will have been taxed at 20 per cent by your bank or building so you could reclaim the difference.
If this is the case, you will need a R40 form from HMRC to claim your rebate.
In the previous year (2010/11), you would have received the personal allowance of someone under 65: £6,475.
To make sure you are paying the right amount of tax, contact HMRC and ask for form P161. Call 0845 300 0627 or go to www.hmrc.gov.uk and type P161 into the search.