Withdrawing Pension how does the tax work?

sparkle24

Hi,


My father has a pension of around 35k. He wants to withdraw all. I Understand he can take 25% tax free leaving £26250 which will be taxed. He earns £17000 a year so his income this year will be £43250.00.


I know he will pay the higher rate tax on anything earned above £42385.00.


My question is - when he receives the lump sum, does that get added to his earnings for that month? (thus being taxed a lot) then the following month when he goes back to just his salary does the tax get adjusted to allow for it?


Any advise welcome.


S

atush

Probably yes. So he'd have to claim it back.

Why he wants to pay 20-40% tax on his pension is another matter. H'ed be far better off leaving it until he isn't working and therefore pay no tax (if drawn yearly up to his PA) or at least only 20% as he would no longer be earning 17K.

Is his his only pension? How will he afford to retire?

Try and talk him out of it if you can.

dunstonh

He wants to withdraw all.

Going back to the start here, but why does he?

A lot of people drawing or intending to draw are doing so on misconceptions and paying a tax bill when they can avoid it.

sparkle24

dunstonh wrote: »

Going back to the start here, but why does he?

A lot of people drawing or intending to draw are doing so on misconceptions and paying a tax bill when they can avoid it.

He wants to draw it all to pay off some debts and a chunk off the house.


I understand there is tax implications just cant seem to find information on if he draws it all how it works?

mgdavid

sparkle24 wrote: »

He wants to draw it all to pay off some debts and a chunk off the house ........

if his mortgage interest rate is lower than the pension fund investment return rate (which it's quite possible to be in the current climate), then that's not exactly a smart thing to do.
Does he have a good head for numbers, or do you think he has taken the best advice before arriving at this decision?

purdyoaten

From my own understanding I believe that the withdrawal of the whole pension in month 1 of the tax year will mean that quite a bit of it will be taxed at, not just 40%, but 45%. Seemingly, PAYE is applied which will assume that income of £1416 (monthly salary) plus £26250 will be received every month - i.e. based on an annual income of £331992 per annum.

One then has the hassle of claiming the excess tax back at the end of the year.

So, if one is going to do it, do so in the last month of the tax year to avoid any HR tax.

sparkle24

purdyoaten wrote: »

From my own understanding I believe that the withdrawal of the whole pension in month 1 of the tax year will mean that quite a bit of it will be taxed at, not just 40%, but 45%. Seemingly, PAYE is applied which will assume that income of £1416 (monthly salary) plus £26250 will be received every month - i.e. based on an annual income of £331992 per annum.

One then has the hassle of claiming the excess tax back at the end of the year.

So, if one is going to do it, do so in the last month of the tax year to avoid any HR tax.

Thanks that is what I presumed. At the end of the year and he has to claim the tax back does he then only pay 40% on earning above the £42385 - or does he pay 40% on all earnings?

jem16

purdyoaten wrote: »

One then has the hassle of claiming the excess tax back at the end of the year.

HMRC has issued new guideline which will allow you to claim before the end of the tax year using form P53Z in the case of those with other employment. The pension provider should issue a P45 if the whole pot has been taken.

There are also other forms to be used where the whole pot has not been used.

See HMRC Newsletter 68;

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/420650/Newsletter_68.pdf

jem16

sparkle24 wrote: »

Thanks that is what I presumed. At the end of the year and he has to claim the tax back does he then only pay 40% on earning above the £42385 - or does he pay 40% on all earnings?

Just the bit above £42,385.

Linton

purdyoaten wrote: »

From my own understanding I believe that the withdrawal of the whole pension in month 1 of the tax year will mean that quite a bit of it will be taxed at, not just 40%, but 45%. Seemingly, PAYE is applied which will assume that income of £1416 (monthly salary) plus £26250 will be received every month - i.e. based on an annual income of £331992 per annum.

One then has the hassle of claiming the excess tax back at the end of the year.

So, if one is going to do it, do so in the last month of the tax year to avoid any HR tax.

Unfortunately doing it at the end of the tax year doesnt avoid HR tax. The emergency tax is taken on a month 1 basis which means that it is taxed as if the date of payment was the first month in the tax year and the same payment would be made every one of the hypothetical following 11 months. The downside of taking the lump sum late in March, as I am finding, is that under the new rules you cant use the P55 get-out to retrieve your tax as its already the new tax year. So it looks like you have to go through the hassle of claiming via self assessment which will take some time. I would like to discuss this with HMRC, but I cant get through to them at the moment.

jem16

Linton wrote: »

So it looks like you have to go through the hassle of claiming via self assessment which will take some time.

I'm assuming you don't already do SA that it will take some time?

I would like to discuss this with HMRC, but I cant get through to them at the moment.

Early in the morning is the best time, preferably before 8am.