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  • Combined Income, Tax and Allowance Confusion

    Hi, I apologies in advance as this is a bit of a long one. Wondering if someone could explain how tax is calculated with two incomes that take you into the higher tax rate. I have two incomes, one from my current employment, £40k, and one from a pension from a previous employment, £15.6k. It’s the first time I’ve had combined incomes high enough to exceed the 20% threshold so unsure how it’s worked out. About 2 years ago my wife transferred £1,260 of her tax free allowance to me when my total combined income was below £50k, taking my tax free allowance to £13830, and reducing hers to £11,310. Tax year 23/24 I exceeded the threshold by about £200, but I had been taxed just over £200 extra in one month by mistake, when I called HMRC to query it and resolve the issue I was asked if I wanted it to be returned the following month, or leave it on my account to cover any tax at 40% I may have to pay, as it looked like I would exceed the threshold by around £300, I asked for it to be held to cover any extra, so technically I’m expecting a small rebate. Since starting this employment I have had pay rises that have increased my combined income to where it obviously exceeds the 20% threshold by a fair amount. I wanted my tax free allowance transferring from my pension to my salary, and was initially expecting my tax free allowance to remain at £13,830, but when I called and made the request my tax free allowance was reduced to £9,760, I asked why, and was told the allowance my wife transferred cannot be used as I earn above £50k, but it would be used to increase my 20% threshold to £51,590, so I'll pay 40% on anything from £55,591, but I can’t find reference to that anywhere. My wife’s tax free allowance is still showing as £11,310, so she hasn’t had the £1,260 transfer returned to her free allowance. During that call the HMRC Rep said my tax free allowance has been reduced to ensure I pay tax on the amount my combined income exceeds the threshold at 40% from my salary, as pensions can only be taxed at BR, which I understand, they said I'm going over the threshold by just over £4k. But I can’t work out why my tax free allowance has been reduced by £2,810 if the 40% tax due on the amount I pay tax at the higher rate is £4,009, tax equates to £1603.60. Why wasn't my tax free allowance reduced to £10,966, rather than £9760? I thought regardless of income your tax free allowance always remains the same, and 20% is taken from the figure from your free allowance, up to the threshold, and then 40% is taken from anything above that amount. Any help someone can give that will help me understand it would be greatly appreciated. Thanks