Money Box - Tax on lump sum withdrawals under new rules

jamesd

Thrugelmir wrote: »

Then there's an inherent danger that the person withdrawing money has no idea as to the potential tax implications.

I wouldn't say danger so much as certainty when it comes to most people.

Thrugelmir wrote: »

The average fund holder is most likely still going to prefer the security of a guaranteed income for themselves (and their partner). Once the dust settles. Small pots will get cashed in. Those with sizable pots (£500k +) will continue to use drawdown.

I think that many will choose to take the money and place it in cash ISA accounts.

Pincher

If you were an overseas landlord, it's no surprise how the HMRC grabs the money first, and refund later.


They make the letting agent deduct emergency tax as the rent comes in. You might have a mortgage to pay, but that's not their problem. All the expenses like commission, service charge, repairs and maintenance, insurance, gas safety certificate etc. are tax deductible, so you WILL get a tax refund, eventually; but unless you make an effort to claim them early, you need deep pockets to stay cash flow positive.


Once upon a time, Knight Frank collected their 10% commission monthly, but now it's from the first two months. I don't know how they work it, but I suspect not only does the landlord not get the commission, but still has to pay emergency tax on it!


It's like nuclear power, they feel much safer when they have their finger on the button, and you don't.

mgdavid

Linton wrote: »

In my experience its neither wrong nor bemusing unfortunately. I put in a one-off request and was charged tax beyond the straight 20% expected. Its not the numeric value of the tax code, but rather tax is levied by default on a "month 1" basis which has the effect the OP described even at the end of the tax year. Whether its a one-off or not doesnt get communicated to HMRC who specifiy exactly how the tax should be taken - the SIPP provider has no choice. I have talked to HMRC who reset the tax code to BR which I think should result in a 20% deduction. However this would only have an effect if I was taking another taxed payment this tax year, which I wont be. So I am probably going to have to wait a few months before I can get a refund of several £K out of HMRC, Hopefully next tax year the BR tax code will still be in force and excessive tax wont be taken.

my point is if you know you are going to make one-off DDs then you tell HMRC and get the code set to BR *first*. Worked for me.

ETA - mine was very late in the year, maybe that worked in my favour. Or maybe post #28 applies, which I think is the case.
If we can plan & manage our savings and pensions then surely we are able to plan & manage our tax too?

jem16

jamesd wrote: »

Not if HMRC send an NT tax code,

There are specific circumstances where an NT tax code would be issued and a pension payment would not be one of them. As a taxable income issuing an NT tax code for a pension payment would simply open up HMRC to having the tax written off at a later date.

maybe not if they send a BR tax code

Yes it could be fine if the pension payment is not your only source of income. Otherwise it's unlikley to be issued as tax would be wrong.

and maybe not if they use a large number L tax code.

The main tax code is issued based on personal allowances and deductions. If you phone HMRC about your tax code they will ask for estimated income, any pension payments, untaxed interest, professional subs etc, etc. This is all entered into the computer which will then spit out a tax code. They cannot just issue a large L tax code which goes against this information.

The employer may be required to use month one basis if they have no tax code but HMRC can do something more sensible to collect the correct amount of tax.

Pension providers are under the same obligation as employers with regard to a first pension payment which is why the Month 1 basis is used. Phoning up HMRC before the first payment is paid will not work as there will be nothing on the computer against your tax record for them to work with.

ashm1

I have not listened to the radio show. My expectation would be PAYE code and then if required a HMRC form required to claim back income tax on lump sum if a refund was due. HMRC seem to list P50 and P53. Now if it is that method I hope people are expecting this method else it will be a bit of an initial shock. But they would have probably taken professional advice so they'd know how much tax was due.

jamesd

jem16 wrote: »

Phoning up HMRC before the first payment is paid will not work as there will be nothing on the computer against your tax record for them to work with.

Just look back at mgdavid's post. I know that HMRC gets a lot of criticism but I don't think that they are going to choose to deliberately issue a tax code that will result in a massive tax overcharge when they are given the opportunity in advance to avoid that.

Two weeks from now there will be little need to wonder because we'll start to find out what HMRC does when they get those calls will HMRC given the information choose a massive tax overcharge or will they avoid it and try to get the correct tax. My experience is the latter - they have accepted my statements when I've asked them to do things because I think that it will minimise the error in tax take.

Bootsox

Much as I like Paul Lewis' Moneybox I often find that the "answers" just generate a load more questions.

Sometimes he will issue a "clarification" (which can heap even more confusion).

Pincher

Bootsox wrote: »

Much as I like Paul Lewis' Moneybox I often find that the "answers" just generate a load more questions.

Sometimes he will issue a "clarification" (which can heap even more confusion).

Paul Lewis is not Jeremy Paxman.


He lets the commercial and governmental spokesmen spin their yarn, asks a question that points out the emperor has no clothes, but doesn't press them to admit they are just blowing smoke up consumer's a**es. He does a silent chuckle which is a cue for you to shrug and move on.

Linton

jamesd wrote: »

Just look back at mgdavid's post. I know that HMRC gets a lot of criticism but I don't think that they are going to choose to deliberately issue a tax code that will result in a massive tax overcharge when they are given the opportunity in advance to avoid that.....

At the moment I believe jem16 is correct, there is no way for anyone to avoid paying excessive tax if taking an initial taxable lump sum now.

But yes, one would be hopeful that HMRC will change their procedures pretty quickly. However there would need to be some new checks as people could be taking lump sums from multiple pensions in the same tax year.

EdSwippet

From this article:

A clarification provided by HM Revenue and Customs to enquiries made by self-invested pension provider AJ Bell stated that emergency taxes do not need to be applied where a tax code is held for an individual and the provider’s systems can separately report the flexibly accessed element.

It states that if this is the case, providers would not need to apply a ‘month 1’ rate, which would multiply any payment and apply tax on the annual equivalent.