tax on a lump sum

Sozgirl

dunstonh wrote: »

You will have to claim the tax back as it will be taxed as month one earnings when deducted. This means part of it as higher rate tax, part at basic rate.

There is a form to do this which I forget the number at this time but many providers will tell you the form number you need when the paperwork arrives and you can download it from the internet.

Thanks for your help.

Soz

wallpaperman

Sozgirl wrote: »

Thank you,

Just one more question, do you have any idea if I will pay to much tax at source and I will then have to reclaim the tax from HMRC.

Thanks again for all your help.

Soz

If you are settling a pension pot of £15000 on the grounds of triviality, you will have tax deducted by the pension company of around £3657.00. As dunstonh has mentioned, a lot of the fund is taxed at 40% as it is making the assumption that this is your monthly salary. This constantly raises questions from policyholders and IFA's, but it is the correct calculation laid down by HMRC.

Your pension company will send a P45 to you shortly after settlement which will confirm the tax deducted.

If you want to reclaim tax immediately you can ask your tax office for Form P53A, otherwise, HMRC will normally work the correct amount out at the end of the next tax year and refund anything overpaid at that point.

Sozgirl

wallpaperman wrote: »

If you are settling a pension pot of £15000 on the grounds of triviality, you will have tax deducted by the pension company of around £3657.00. As dunstonh has mentioned, a lot of the fund is taxed at 40% as it is making the assumption that this is your monthly salary. This constantly raises questions from policyholders and IFA's, but it is the correct calculation laid down by HMRC.

Your pension company will send a P45 to you shortly after settlement which will confirm the tax deducted.

If you want to reclaim tax immediately you can ask your tax office for Form P53A, otherwise, HMRC will normally work the correct amount out at the end of the next tax year and refund anything overpaid at that point.

Thanks you very much for setting this out so clearly for a dummy like me.

Sorry again, but will they tax the whole £15000.00 is the first 25% not tax free ?

Thanks again

Soz

wallpaperman

Sozgirl wrote: »

Thanks you very much for setting this out so clearly for a dummy like me.

Sorry again, but will they tax the whole £15000.00 is the first 25% not tax free ?

Thanks again

Soz

Hi there, it's quite a complicated calculation. You would be surprised at how many IFA's don't understand it, and think the pension company are mistaken. Hopefully your pension provider will give a decent explanation in layman's terms but it goes something like this;

You pay no tax on 25%, i.e. £3750.00 which reduces £15,000 down to £11250.00.

You then get your annual allowance of £8105.00 taken into account, the monthly equivalent of this is £675.00, so this takes the taxed figure down by £675 from £11250.00 to £10575.00.

The company will then deduct 20% tax on £2864.00 totalling £572.80.

They will then deduct 40% tax on £7711.00 totalling £3084.20.

Total tax £572.80 plus £3084.20 = £3657.00

It's all to do with the assumption that you will be getting £15000.00 every month, which is obviously not the case, but this is how HMRC have advised that the deduction must be made.

Spiderham

Also doesn't your personal allowance reduce once your earnings go over £100k by £1 for every £2 you earn (ie gone completely by £116,210). £11,250 per month would be the equivalent of £135k per annum, so by my reckoning your personal allowance would be ignored.

If I'm right on this tax would be

20% x £2,864 + 40% x £8386 = £3,927.20

Is this right? If not, please correct me.

wallpaperman

Spiderham wrote: »

Also doesn't your personal allowance reduce once your earnings go over £100k by £1 for every £2 you earn (ie gone completely by £116,210). £11,250 per month would be the equivalent of £135k per annum, so by my reckoning your personal allowance would be ignored.

If I'm right on this tax would be

20% x £2,864 + 40% x £8386 = £3,927.20

Is this right? If not, please correct me.

Hi, that rule isn't taken into account for the tax on triviality calculation. Whether it was thought by HMRC that this would make things even more complicated (and take even more tax from the payment at the time the benefits were settled), I don't know.

SippTechie

Not sure whether this has been mentioned, or whether it is of any use, but the requirement to tax trivial commutation lump sums at the emergency code rate will change from 6 April 2013.

Instead of being required to tax at emergency code, pension administrators will be required to tax using the BR tax code.

If you could wait until April 2013 then you'd be charged a bit less in the way of tax.

You'll see a snippet about it here:

http://www.hmrc.gov.uk/pensionschemes/news.htm

Sozgirl

Thanks everyone for your input, it has all been a great help.

Soz

jem16

Sozgirl wrote: »

Sorry I'm a bit thick, not sure what you mean by taxable income, I don't earn any taxable income but not sure if that's what you mean.

Taxable income also includes interest from savings accounts plus any dividend payments from investments. It's not just earned income.

This would all have to be declared when applying for any rebate due.

atush

You say you have no taxable income but work for the family business- do they pay you under the counter or something? You should pay tax on what they pay you or at least take it into acct as income once you receive the 15K