tax implications of a pension withdrawal

jem16

billozz wrote: »

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

As your pension payment will be paid on a Month 1 basis, it will be worked out like this;

First £883 is tax free which leaves £14,117
Next £2648 is taxed at 20% which is £529.60
Remaining £11,469 is taxed at 40% which is £4587.60

So total is £5117.60

As molerat explained, based on your expected income over the whole tax year, your tax bill would be an extra £3123 for the pension so you would be due a refund. You will have to apply for this refund once you receive the P45 from the pension company if you take the whole pot.

billozz

of the 20,000 i thought i got 25% tax free, which leaves 15,000 to pay tax on, is that not correct?

jem16

billozz wrote: »

of the 20,000 i thought i got 25% tax free, which leaves 15,000 to pay tax on, is that not correct?

Yes and £15,000 is what I calculated the tax on.

Why are you asking?

billozz

so i will pay 1/3 of it in tax? seems a lot

molerat

You will only "pay 1/3" in tax due to the way lump sum pension payments are taxed in accordance with HMRC regulations, the same as in any job where you are given the emergency tax code (1060LM1). You should be able to reclaim around £2000 of that tax once you have the P45.

jem16

billozz wrote: »

so i will pay 1/3 of it in tax? seems a lot

Initially yes but you will get some back.

However why take any of it whilst you are still working? Wait until you are not working and you may pay less tax on it depending on what other sources of income you will have.

billozz

i have been told by my pension company that i will get 25% tax free and they will deduct 20% of the balance, and leave it to me to correct the difference when i come to do my tax return.

xylophone

i have been told by my pension company that i will get 25% tax free and they will deduct 20% of the balance, and leave it to me to correct the difference when i come to do my tax return.

http://www.pruadviser.co.uk/content/knowledge/technical-centre/taxation_on_pension_income/#

http://www.jameshay.co.uk/DocumentView.aspx?DocumentID=3063

seem to indicate month 1 basis as per Jem's post.

dori2o

jem16 wrote: »

As your pension payment will be paid on a Month 1 basis, it will be worked out like this;

First £883 is tax free which leaves £14,117
Next £2648 is taxed at 20% which is £529.60
Remaining £11,469 is taxed at 40% which is £4587.60

So total is £5117.60

As molerat explained, based on your expected income over the whole tax year, your tax bill would be an extra £3123 for the pension so you would be due a refund. You will have to apply for this refund once you receive the P45 from the pension company if you take the whole pot.

jem, the code operated on suc a payment woud be 0T Mth1 not 1060l M1, so there would be no 0% band. Therefore the tax on 15k would be :
2648 @ 20% = 529.60
12352 @ 40% = 4940.80

Total = 5470.40

You can then reclaim the overpaid tax by completing form P53Z.

You would need to show any refund on your tax return at the year end.

molerat

Other web sites suggest BR would be used, as posted by OP in #18, but it seems impossible to find the real answer on the new dumbed down .gov site. http://www.litrg.org.uk/tax-guides/pensioners-tax/how-do-i-cash-in-my-small-pension-trivial-commutation