"In most cases people will pay an emergency tax rate on the payment and then they have the option to reclaim the overpaid tax immediately from HMRC, or wait until HMRC makes the tax adjustment in the following April"
‘While it’s inconvenient, it’s better to take a cautious approach and pay a bit more tax upfront, and immediately reclaim this from HMRC, rather than find out you owe the taxman once the money has been spent.
‘The overriding message is that while new pension flexibilities give you far more options, it’s important to plan how you are going to spread your income across retirement because there’s likely to be a range of factors and administration to consider. A lump sum will be right for some but it’s benefits needs to be considered in the context of how much tax you’ll pay and where your regular income will come from.”
Because the emergency tax is applied before payment, people will receive less than they are due
-
It’s important people don’t spend money before they have it as a result
-
While this ‘reclaim’ process will involve some paperwork, it’s better people overpay rather than face a bill from the tax man at a later date
From April, people looking to fully cash in their pension under the new pensions flexibilities will be taxed as follows:
-
The payment will be considered income and under HMRC rules, providers will apply an emergency tax code. This means that tax is likely to be overpaid
-
While 25% of pension income is tax free this emergency tax code will apply to the remainder
-
The tax is applied before the payment is made
-
Recipients can contact HMRC and complete a Repayment Claim form to ensure that the overpaid tax is refunded
-
If recipients don’t make a claim, HMRC will review the position at the end of the tax year and issue a tax calculation showing any under or overpayment of tax
-
There will be some exceptions to this process where a pension provider is already paying an individual an income and is able to calculate the tax bill based on PAYE scheme information
-
If only part of the pension is withdrawn, the provider will apply an emergency tax code, or the tax code from the individual’s P45, only for the first payment. HMRC will then send a new tax code to the provider for future payments. The new tax code will include adjustments from the first payment.
|