RE1625 mentions that you need to calculate whether the
claimant would have enough income tax suffered to cover his
expected income tax liability for the year if one or more of his
annuities is paid without tax being deducted. If there is
sufficient income tax suffered then the other annuity(ies) can be
paid without tax being deducted. Examples of these calculations are
below. The examples are based on allowances and tax rates for the
year 2001 - 2002.
Example 1 - two identical annuities.
Mr Williams who is 67 has two purchased life annuities (PLAs)
both of which are currently paid under deduction of income tax.
Details of his annuities, expected income and allowances for the
year are shown below.
| Usual amount of income tax deducted | ||
| Pension |
4,500 | |
| Full annual taxable amount of PLA(a) |
2,000 |
400.00 |
| Full annual taxable amount of PLA(b) |
2,000 |
400.00 |
| Total expected income |
8,500 | |
| Less personal allowance (age 65-74) |
5,990 | |
| Net income |
2,510 | |
| Tax due; | ||
| Starting rate - 1,880 at 10% |
188 | |
| Savings income - 630 at 20% |
126 | |
| Tax |
314 |
At the end of the year Mr Williams would have an income tax
liability of £314 and have suffered tax by deduction of
£800 in total giving him a net repayment due of £486. He
is eligible to have one of his annuities paid without tax being
deducted as this would still leave him with income tax suffered by
deduction of £400 to cover an expected tax liability of
£314. If he applies to his Inland Revenue office they would
follow the procedures at RE1626 to have one of the annuities paid
gross. As the annuities are for the same amount it would not matter
which was paid gross, if Mr Williams had any preference that could
be followed.
At the end of the year we would repay any tax overpaid to Mr
Williams.
Example 2 - one large, one small annuity.
Mr Hudson also has two PLAs both of which are currently paid
under deduction of income tax. Details of his annuities, expected
income and allowances for the year are shown below.
| Usual amount of income tax deducted | ||
| Wages | 4,000 | |
| Full annual taxable amount of PLA(a) | 3,000 | 600.00 |
| Full annual taxable amount of PLA(b) | 1,000 | 200.00 |
| Total expected income | 8,000 | |
| Less personal allowance | 4,535 | |
| Net income | 3,465 | |
| Tax due; | ||
| Starting rate - 1,880 at 10% | 188 | |
| Savings income - 1,585 at 20% | 317 | |
| Tax | 505 |
At the end of the year Mr Hudson would have an income tax
liability of £505 and have suffered tax by deduction of
£800 in total giving him a net repayment due of £295. He
is eligible to have the smaller of his annuities (PLA(b)) paid
without tax being deducted as this would still leave him with
income tax suffered by deduction of £600 to cover an expected
liability of £505. If he applies to his HMRC office they would
follow the procedures at RE1626 to have the smaller of the
annuities paid gross. The larger annuity (PLA(a)) could not be paid
gross as this would leave Mr Hudson with a net income tax liability
at the end of the year - tax due of £505 and income tax
suffered by deduction of only £200.00 (see RE1625).
At the end of the year we would repay any tax overpaid to Mr
Hudson.
Example 3 - three annuities.
Mr Cabot has three annuities that are currently paid under
deduction of income tax. Details of his annuities, expected income
and allowances for the year are shown below.
| Usual amount of income tax deducted | ||
| Pension | 4,000 | |
| Full annual taxable amount of PLA(a) | 800 | 160.00 |
| Full annual taxable amount of PLA(b) | 1,000 | 200.00 |
| Pension annuity paid under deduction of income tax | 850 | 187.00 |
| Total expected income | 6,700 | |
| Less personal allowance | 4,535 | |
| Net income | 2,165 | |
| Tax due; | ||
| Starting rate - 1,880 at 10% | 188 | |
| Savings income - 285 at 20% | 57 | |
| Tax | 245 |
At the end of the year Mr Cabot would have an income tax
liability of £245 and have suffered tax by deduction of
£547 in total giving him a net repayment due of £302. He
is eligible to have one of his annuities paid without tax being
deducted as this would still leave him with sufficient income tax
suffered by deduction to cover his expected tax liability of
£245. If PLA(a) is paid gross he will have income tax suffered
of £387, if PLA(b) or PLA(c) are paid gross the figure is
£347 and £360 respectively. Mr Cabot cannot have two of
his annuities paid gross as none of them on their own will suffer
enough income tax to cover his tax liability of £245.
If Mr Cabot applies to his HMRC office they would follow the
procedures at RE1626 to have one of the annuities paid gross. On
the face of it having the largest annuity, PLA(b), paid gross would
be the most beneficial to Mr Cabot as this would give him more
money during the year and a smaller repayment at the end. His HMRC
office should suggest that PLA(b) is the one to be paid gross
unless Mr Cabot would prefer it to be one of the others.
Example 4 - no annuities eligible for gross payment.
Mr Cook has two PLAs that are currently paid under deduction
of income tax. Details of his annuities, expected income and
allowances for the year are shown below.
| Usual amount of income tax deducted | ||
| Pension | 5,000 | |
| Full annual taxable amount of PLA(a) | 2,000 | 400.00 |
| Full annual taxable amount of PLA(b) | 1,000 | 200.00 |
| Total expected income | 8,000 | |
| Less personal allowance | 4,535 | |
| Net income | 3,465 | |
| Tax due; | ||
| Starting rate - 1,880 at 10% | 188 | |
| Savings income - 1,585 at 20% | 317 | |
| Tax | 505 |
At the end of the year Mr Cook would have an income tax
liability of £505 and have suffered tax by deduction of
£600 in total giving him a net repayment due of £95. He
is not eligible to have either of his annuities paid without tax
being deducted as this would leave him with a net income tax
liability for the year (see RE1625).
If PLA(a) is paid gross he will have income tax suffered of
£200, if PLA(b) is paid gross he will have income tax suffered
of £400. Neither of these amounts is sufficient to cover his
expected income tax liability for the year of £505. If Mr Cook
applies to his HMRC office they would inform him that it would not
be appropriate for either of his annuities to be paid without tax
being deducted for this reason
At the end of the year we would repay any tax overpaid to Mr
Cook.
