Question
Are taxes on income (from employment or pensions) assumed to be paid same-year, or in arrears?
Answer
Taxes on employment income are assumed to be paid in the same year as earnings (via PAYE), provided the earner is an employee or company owner. If the income is entered as Employment income with the Source field set to Employed or Company Owner, taxes will be paid on the income in the year that it is earned (except any dividend tax).
Secure pension income is also taxed via PAYE e.g. state pension, final salary pensions.
Note - If after end of year assessment the individual is found to have paid too much or too little tax for the year, a balancing tax payment or refund (shown as a tax credit) will appear in the cash flow chart in the following year.
Taxes on self-employment earnings are paid in arrears, following end of year assessment. If the income is entered as Employment income with the Income Source field set to Self-Employed, taxes will be paid on the income in the following year of the plan. You can over-ride this using the Tax as PAYE toggle.
Taxes on other income sources (e.g. rental income, royalties), entered as Other Income, are paid in the following year, following end of year assessment.
Taxes on the interest and dividends on savings and taxable investments are paid in the following year, following the end of year assessment.
The timing of tax on income from money purchase and drawdown pensions depends on how the income is taken. Generally, taxes are paid in arrears, following end of year assessment. However, planned withdrawals from drawdown pensions are taxed in the year of the withdrawal.
Truing incomes with the personal allowance
Question
Why are taxes sometimes due at end of year for individuals with multiple pensions or employment incomes?
Answer
Pension and employment incomes are taxed separately via PAYE. As a result, the individual's full personal allowance will be applied to each income source. a At the very end of the planning year a final tax assessment is performed by the software and tax expenses are then trued up with the calculation across all incomes. Any taxes remaining will be paid in the following year of the plan. This can be seen on the Expenses and Taxes tabs of the charts' Year View.
In practice, each employer or pension provider would usually have a coding statement from the HMRC, which would provide the amount of personal allowance in coordination with other sources of income. However, for sake of simplicity, the software does not model coding statements.
For example, Carol earns approximately £24,575 from her pensions in 2015. During the year she pays in taxes, via PAYE, £318 on the income from her NHS final salary pension and £939 on her Royal Mail pension. These PAYE taxes can be seen on the Expenses tab of the Let's See chart Detailed Info panel. Her total income tax calculated at end of year is £3,092 leaving the remainder of £1,823 to be paid in the following year of the plan. This calculation is shown as a worksheet on the Taxes tab of the chart panel. Click the next bar/year of the chart for 2016 and viewing the chart details you will find a line item on the Expenses tab, "Taxes for Year 2015 - £1,823"