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Pension tax in year of retirement
Domain.Rider
Posts: 94 Forumite
I retired at the end of July and started receiving pension income from a final salary scheme (main income) and an AVC scheme (secondary income). My total pension income is well below the higher rate tax threshold.
The total of my income for the tax year (full salary from April 6th to end of July plus pension from August to April 6th 2011) will marginally exceed the higher rate tax threshold. I have already paid the tax for my salary to the end of July at source.
Because my total income this tax year will exceed the higher rate threshold, the tax office has told the AVC scheme pension to deduct tax at 40% for this tax year.
Will I be able to reclaim this higher rate tax deduction on my pension?
When I rang the tax office, they told me that I could claim for overpayment in April if I felt I had overpaid, but they wouldn't tell me directly whether I could reclaim the higher tax on my pension income(!)
The total of my income for the tax year (full salary from April 6th to end of July plus pension from August to April 6th 2011) will marginally exceed the higher rate tax threshold. I have already paid the tax for my salary to the end of July at source.
Because my total income this tax year will exceed the higher rate threshold, the tax office has told the AVC scheme pension to deduct tax at 40% for this tax year.
Will I be able to reclaim this higher rate tax deduction on my pension?
When I rang the tax office, they told me that I could claim for overpayment in April if I felt I had overpaid, but they wouldn't tell me directly whether I could reclaim the higher tax on my pension income(!)
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Comments
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From the information you have given you fall into the 40% tax bracket for the whole of this fiscal year. I'm not sure of your reasoning of why you think there is any tax to claim back.0
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Domain.Rider wrote: »I retired at the end of July and started receiving pension income from a final salary scheme (main income) and an AVC scheme (secondary income). My total pension income is well below the higher rate tax threshold.
The total of my income for the tax year (full salary from April 6th to end of July plus pension from August to April 6th 2011) will marginally exceed the higher rate tax threshold. I have already paid the tax for my salary to the end of July at source.
Because my total income this tax year will exceed the higher rate threshold, the tax office has told the AVC scheme pension to deduct tax at 40% for this tax year.
Will I be able to reclaim this higher rate tax deduction on my pension?
When I rang the tax office, they told me that I could claim for overpayment in April if I felt I had overpaid, but they wouldn't tell me directly whether I could reclaim the higher tax on my pension income(!)
Whether you pay 40% tax or not depends on your total income, not on constituent parts. If at the end of the year the tax deducted from each part of your income adds up to more than you are due to pay, then yes, you can claim a refund.
The taxman may for convenience arrange it so that you overpay on one part and underpay on another - he will have done his best to ensure that any total discrepancy is minimal0 -
I am unsure exactly what this means and I think this is the nub of the issue.the tax office has told the AVC scheme pension to deduct tax at 40% for this tax year.
Does this mean the OP pays 40% on the entire pension when it's only due on a small part, or do the AVC scheme have something cleverer (like PAYE) where the 40% only kicks in when it's due.
If they apply a blanket 40% and the OP has marginally slipped into the 40% then I can understand the concern.
Any overpayment or underpayment can be sorted out at the end of the tax year, but I'm unsure what happens in between as I'm unsure how pensions schemes apply their tax (in a blanket manner or more cleverly). Perhaps someone can answer this?0 -
The AVC pension is the secondary pension, and the personal allowance doesn't apply (having been accounted for by the main pension). So this part of the pension is fully taxed at the appropriate rate. They told me they'd take off 20% tax by default unless told otherwise by the tax man. The tax man has just told them to deduct 40%.
I am unsure exactly what this means and I think this is the nub of the issue.the tax office has told the AVC scheme pension to deduct tax at 40% for this tax year.
Having to pay 40% tax on my pension (which is only half way into the 20% tax bracket on an annual basis), means that I must make extra economies until April next year. What with all the other things to think about, I hadn't considered this possibility, but it sounds like I'm stuck with it.0 -
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It's just that I hadn't anticipated paying 40% on the pension. My mistake - I overlooked the fact that adding a few months full salary to the subsequent pension income would take me over the higher tax threshold, meaning that the pension income would be taxed at 40% too.Loanranger wrote: »From the information you have given you fall into the 40% tax bracket for the whole of this fiscal year. I'm not sure of your reasoning of why you think there is any tax to claim back.
[Part of the problem was that the whole retirement thing was very rushed - one Friday I received notification of pension changes that would take effect the following Thursday, and had only the weekend to evaluate whether I should retire early, so I could apply on the Monday and be retired by the Thursday(!) Fortunately, it all worked out OK, and this tax issue is a relatively minor annoyance in the great scheme of things].0 -
Domain.Rider wrote: »Having to pay 40% tax on my pension (which is only half way into the 20% tax bracket on an annual basis), means that I must make extra economies until April next year. What with all the other things to think about, I hadn't considered this possibility, but it sounds like I'm stuck with it.
Not necessarily.
What tax code has been applied to your main pension income? If it's 647L it may be possible for HMRC to adjust your tax code so that more tax is taken off the main income and BR is applied to the secondary pension. That way "may" work out better than having 40% tax taken off the whole secondary income resulting in you paying too much tax and having to claim it back next April.
http://www.hmrc.gov.uk/incometax/check-multiple-codes.htm
It really depends on figures. What are they for each section - salary, main pension and AVC?0 -
its because the the AVC provider use week1/month 1 rules.
Heres the HMRC guidance
http://www.hmrc.gov.uk/paye/intro/tax-codes.htm#3
even people taking benefits under triviality rules can get caught by it.0 -
feesarefare wrote: »its because the the AVC provider use week1/month 1 rules.
Heres the HMRC guidance
http://www.hmrc.gov.uk/paye/intro/tax-codes.htm#3
even people taking benefits under triviality rules can get caught by it.
The 40% tax code isn't an emergency tax code though so in this situation it doesn't apply.
HMRC have applied a D0 code to take 40% off his secondary income as opposed to a BR code as over the course of the year the OP is a higher rate taxpayer. The problem is that the OP feels that this will take off too much tax at 40%.0 -
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