What Is The Relationship Between The Tax-Free Amount And Annual Tax Free Amount?

[davidk65]

Background: I am Retired and over 80.
My search for enlightenment started because my ex employer went bust a couple of years ago
( I retired quite some years before that happened).Fortunately the pension scheme I was in continued to pay out but at a reduced amount. That pension scheme in now being closed down and the "pot" of money they had allowed them to "sell us" to another pension provider. The new provider takes over shortly. My annual pension is just over £10,000. In my last payment I received a lump sum in back pay, this has had the effect of pushing my tax up through the roof. I now need to satisfy HMRC a) what the back pay is for and b)to what years it relates too. I am endeavouring to get the info to do this but this appears to be a long process.
In attempt to clarify things I went on line to "My Personal Tax Account" (HMRC). There I discovered my Tax-Free Amount is stated as being £13,750 ( I agree with this amount being how much I can earn before paying tax.). However; I also came across another amount described as: Annual Tax-Free Amount stated as being £4,587. I understand that this amount is arrived at by deducting my State Pension from my Personal Allowance.
Which brings me back to my question:
i.e The relationship between these two amounts. Both stated as tax-free but totally different amounts?

[New Judge]

The relationship is as you've described it. Your personal allowance is what you can have as income before any tax is deducted. If you have a State Pension that is paid free of tax but it forms part of your taxable income. So it is deducted from your personal allowance to give the amount in other income you can have before tax is deductible.

As an aside, I don't understand why your personal allowance is quoted as £13,750. The current personal allowance is £12,500. Were you or your spouse/civil partner born before 6th April 1935?

[THECORBYLOON]

I was stumped looking for the figures but I think it could be the Marriage Allowance.

"The marriage allowance for 2019/20 is £1,250 and it enables a spouse or civil partner who is not liable to income tax at a rate higher than the basic rate (or higher than the intermediate rate if a Scottish taxpayer) to transfer £1,250 of their personal allowance to their spouse or civil partner. The recipient spouse or civil partner also must not be liable to income tax above the basic rate"

[THECORBYLOON]

That was to explain the £13,750 figure (£12,500 + 10% = £13,750)

[THECORBYLOON]

The Marriage Allowance allows a transfer of 10% of a person's Personal Allowance, hence the £1,250 figure given in my first quote.

Apologies if this has made it more complex than it appears.

[davidk65]

Thanks for the response. As pointed out by TheCorbyLoon £13,750 is inclusive of a transfer £1,250 married allowance. Sorry I can't grasp the relevance of the Tax-Free amount of £4,587 and how it impacts on my income and the tax I pay. For example: Total Income £20,500. Less Tax-Free amount of £13,750 =£6,750. On this amount I would pay tax at 20% i.e £1,350. I know where the £4,587 comes from but not were it fits in. For example are my future earnings limited to this amount of an increase?

[New Judge]

//For example: Total Income £20,500. Less Tax-Free amount of £13,750 =£6,750. On this amount I would pay tax at 20% i.e £1,350. I know where the £4,587 comes from but not were it fits in.//


Where it comes in is that your tax free allowance is £4,587. You can forget about the £13,750 altogether. That is the "starting point" if you like, but the end point is £13,750 minus your state pension (which I assume is £9,163). When calculating your tax bill you don't consider your State Pension as income (becuase it has been paid tax free but your tax allowance has been reduced to cover the tax). So with a total income of £20,500 (including a State Pension of £9,163) the amount considered for tax is (£20,500 - £9,183), or £11,317. Your personal allowance is £4,587, meaning you must pay tax on £6,730. At 20% this is £1,346, which is not unadjacent to your figure.