tax implications of a pension withdrawal

billozz

hi all quick question,
i have a pension pot of £20,000 that i would like to take as a lump sum. i understand that i will get 1st 25% of it tax free then pay tax onthe balance. 2 questions,
i earn £28,000 p/a and am self employed, will the £15,000 take me into the 40% tax bracket and if so would someone tell me what tax i will end up paying please.
if i leave the balance and then withdraw a smaller ammount next year, for instance £10,000, then the remaing £5000 the year after will this change my tax liability.
thanks hope i have explained it ok but basically i am loathe to pay 40% and if taking it in chunks will help with that then i will try to do that.
thanks
Bill

molerat

With a tax code of 1060 you need an income of £42385 to pay 40% tax. Taking all of the pension will mean paying an extra £123 tax. Splitting it across tax years will remove that extra tax liability.

billozz

thanks for the answer,
im adding 15000 to my normal 28000 earnings so this will incur extra tax, correct regardless of going through the 40% bracket, am i right?

molerat

It will only add "extra" tax of £123 by putting you just into the 40% bracket. You would still have to pay £3000 tax on the £15000 anyway.

zygurat789

molerat wrote: »

With a tax code of 1060 you need an income of £42385 to pay 40% tax. Taking all of the pension will mean paying an extra £123 tax. Splitting it across tax years will remove that extra tax liability.

As the OP is self employed he will not have a tax code.
After the 25% TFLS the balance of the pension pot is taxed as earned income ie it is like an extra job. Although the figure of £42,385 is widely used it is only correct when a taxpayer has no other allowances such as pension payments.

Pennywise

The actual tax deducted from the payment could well have 40% tax deducted as a month 1 tax code will be used, so the annual limits will be divided by 12. The surplus tax is recoverable direct from HMRC but could take a while. So don't expect only £3k tax taken off the pension when it's paid to you.

purdyoaten

Pennywise wrote: »

The actual tax deducted from the payment could well have 40% tax deducted as a month 1 tax code will be used, so the annual limits will be divided by 12. The surplus tax is recoverable direct from HMRC but could take a while. So don't expect only £3k tax taken off the pension when it's paid to you.

And isn't that going to be (another) nightmare?

billozz

Pennywise wrote: »

The actual tax deducted from the payment could well have 40% tax deducted as a month 1 tax code will be used, so the annual limits will be divided by 12. The surplus tax is recoverable direct from HMRC but could take a while. So don't expect only £3k tax taken off the pension when it's paid to you.

so that will be 40% deducted from the 15000 beofre its paid to me, then i claim it back from hmrc ?

jem16

billozz wrote: »

so that will be 40% deducted from the 15000 beofre its paid to me, then i claim it back from hmrc ?

If you took £15k all at once you would pay some tax at 0%, some at 20% and some at 40%.

Tax bill would be roughly £5117.

billozz

jem16 wrote: »

If you took £15k all at once you would pay some tax at 0%, some at 20% and some at 40%.

Tax bill would be roughly £5117.

thanks for the reply, can you explain that figure please as molerat seems to thnk it would be 3123 ...i think!

molerat

How it is taxed by the pension co at the time of payment (due to HMRC rules) and how much tax is actually due on the amount for the financial year is where the different numbers come from and will need to be sorted at year end.