Personal allowance and 25%tax free calculation

frugal90

If I take up to the tax free personal allowance from my sipp and I have no other income then can I also take 25% of that amount tax free? Saw a figure on another website that mentioned taking £10600 when the 25% tax free added the figure becomes £14133. Can someone explain how this calculation works? I realise that the 25% is 25% of the £14133.

For example if the personal allowance were £12000 how would I calculate the 25% and then the final figure?

Bit rusty with my arithmetic - thanks all.

jamesd

Say the amount in the pension pot is £14133. 25% of that is £3533.25 so anyone can take that much as a tax free lump sum. The remaining £10599.75 is taxable but this is within the planned £10800 personal allowance for the 2016-17 tax year so a person with no other taxable income could take that tax free as well.

The savings allowances can allow higher income while still letting you take the pension tax free.

frugal90

Thanks , but as the tax free allowance increases how do I do the sum to work out what the 25% is?

molerat

Your normal tax free allowance would equate to 75% of the total you withdraw from the pension so this year you could take £14133, £3533 as the 25% and £10600 taxable. The calculation is tax free allowance + 1/3 of tax free allowance.

frugal90

Thanks , I had calculated it was a 1/3 rd but wanted to see it as an equation.

zagfles

frugal90 wrote: »

Thanks , I had calculated it was a 1/3 rd but wanted to see it as an equation.

Well if you want the algebra.

Amount drawn is D. Personal allowance is P.

25% is tax free anyway, so to get the max tax free the taxable 75% of D must equal the personal allowance P

So 0.75D=P

So D=P/0.75

0.75 is 3/4, so written alternatively D = 4P/3 or D= P + P/3 or P plus a third as above.

Bootsox

If,

the initial amount in the pot = X
the personal allowance = P
maximum withdrawal = D

Then,

D = 0.25X + P and, after the first year, the remainder pot = X - (0.25X + P) = 0.75X - P

For the remainder pot to end up zero after the first year,

0 = 0.75X - 10,600

Rearranging, 0.75X = 10,600 and therefore X = 14,133

Giving an initial pot size of £14,133

That is the maximum pension pot size you can extinguish in one financial year without paying tax (assuming no other income sources)

kidmugsy

25%/75% = one third.

frugal90

thanks

clear now

frugal