Is a 'tax-free' lump sum classed as taxable income?

warric48

I recently passed the age of 65, and decided to carry on working for a few years more. My pension scheme allowed me to take my pension as well, and I took a 'tax-free' lump sum.

HMRC have now added that lump-sum to my annual taxable income for this tax year, with the result that the total is over the limit for receiving the personal allowance (currently £9440).

Is it correct that something classed as tax-free is also classed as taxable income?

atush

No, it should not be. Contact HMRC.


What might be happening is the income from the pension is affecting things. This income can go into another pension.

dunstonh

Is a 'tax-free' lump sum classed as taxable income?

It wouldnt be called a tax free lump sum if it was

HMRC have now added that lump-sum to my annual taxable income for this tax year, with the result that the total is over the limit for receiving the personal allowance (currently £9440).

Did you take the lump sum under triviality? i.e. not the tax free lump sum of 25% but the whole pension pot?

teddysmum

If your state pension is more than the annual tax allowance, they cannot take tax at source. Your wage would then be fully taxed with an extra deduction to cover the tax owed from sate pension. This is done by a K code (among others).


When we were faced with this, the figures seemed wrong, as state pension age was reached mid tax year, but some mathematical calculations proved that it was correct.


Could this be what happened in your case ?

warric48

dunstonh wrote: »

It wouldnt be called a tax free lump sum if it was



Did you take the lump sum under triviality? i.e. not the tax free lump sum of 25% but the whole pension pot?

Thanks for the reply - I took the largest lump sum available (25% of the pot)

warric48

teddysmum wrote: »

If your state pension is more than the annual tax allowance, they cannot take tax at source. Your wage would then be fully taxed with an extra deduction to cover the tax owed from sate pension. This is done by a K code (among others).


When we were faced with this, the figures seemed wrong, as state pension age was reached mid tax year, but some mathematical calculations proved that it was correct.


Could this be what happened in your case ?

Thanks for the reply - no, I don't think this is it - I have deferred my state pension, and I'm paying 40% tax on my private pension income, as I am still working and the total income from work and this pension puts it at the 40% level. However, this total is nowhere near the £100k point, at which the personal allowance starts to disappear. It's only the addition of the lump sum that takes it over that.
HMRC have given me a 'K' coding for my salary - I will try to call them, although I have done this a couple of times recently without being able to get through to anybody - their phone system is a bit of a labyrinth!

xylophone

http://www.hmrc.gov.uk/pensionschemes/take-pension.htm
http://www.hmrc.gov.uk/incometax/codes-basics.htm#3

You have seen this? You will note that the 25% is tax free. Is it possible that you have misunderstood the P800 figures?

Is there any possibility that your lump sum has been mistaken for some sort of redundancy payment?

warric48

xylophone wrote: »

You have seen this? You will note that the 25% is tax free. Is it possible that you have misunderstood the P800 figures?

Is there any possibility that your lump sum has been mistaken for some sort of redundancy payment?

Thanks, yes - I have seen these links, HMRC are definitely considering it as taxable income, they included a note to say that the personal allowance was being wihdrawn as my total income for the year was above the upper limit of £118,800 (approx., don't have the coding notice in front of me).
I think you are correct, they have not realised it is a pension lump sum, although they must have received the information from my pension provider.
I will try to put them right!

atush

Let us know what happens.


Have you thought of starting a new personal pension to take you out of HRTax? Or at least claw some of it back?

teddysmum

HMRC lines are less busy on Saturdays.

warric48

teddysmum wrote: »

HMRC lines are less busy on Saturdays.

Yes, managed to get through this morning after only 35 mins wait - all sorted now, they had me listed as having 2 separate employments with the same company, and the pension lump sum was listed as income for the 2nd employment. New coding notice on its way.

Thanks very much for all the help, this site is such a useful resource.