Tax on lump sums

Daisyone

This posting might sound a bit dense so apologies!


I am currently helping my partner sort out his pension stuff for when he is 65 in two months time.

He has not had any income for 2016/17 so far. Once his state and small occupational pension are in payment, I estimate he will have 'earned' approx£6240 by the end of the tax year.

He also has some small pension pots and added together (after the 25% tax free) I reckon that he will pay tax on about £8200.

As he will not have used all of his personal allowance up for the year (assuming he does not work) , I am wondering whether he will get a rebate from the tax paid on the lump sums? If so, will this be automatic or will he need to do a tax return/claim it?

Thanks in advance for any help.

ex-pat_scot

Daisyone wrote: »

He has not had any income for 2016/17 so far. Once his state and small occupational pension are in payment, I estimate he will have 'earned' approx£6240 by the end of the tax year.

He also has some small pension pots and added together (after the 25% tax free) I reckon that he will pay tax on about £8200.

You say "he will pay tax on about £8200".


Do you mean "he will earn £8200 in total for the 2016/17 tax year"?


ie state pension plus occupational £6240
other pensions £2000 (ish)
Total £8200


In this case, then he should not pay tax at all.


Have you considered whether you might change tack slightly?
It would be optimal if he took a total of £10,600 (ie used up all his personal allowance).
He could do this by changing one or more of his pensions into drawdown rather than purchasing annuities with them. This would give the flexibility to draw up to the limit of the PA.
Any income tax suffered would be reclaimed via HMRC - the occupational pension (if an annuity) should know his basic rate tax code (something like 1060L) and not deduct any tax. The other pension pots would need contacting to discuss how they deduct tax at source and try and arrange for any deduction to be without tax.

atush

Yes, he can use his PA against some of the taxed portions of his smaller pensions.

the thing is, why take them all at once? Why not wait a year for each one, using his leftover PA each time?

Seems foolish to pay tax when you dont need to

xylophone

Your husband has a standard personal allowance of £11,000?

He is going to receive a regular monthly pension from his occupational scheme and a state pension, and up to the end of the tax year these payments will total £6240?

With regard to the other pensions, you indicate that he intends to take the tax free lump sums from these.

How is he thinking of taking the balance?

Would he not be better of by putting these pensions into drawdown and only taking as much income as would keep him within his personal allowance?

If this were done, HMRC would be in a position to issue the appropriate codes to the pension providers so that he would not overpay tax.

If what he envisages is taking the 25% tax free from his personal pensions and drawing down the rest as lump sums in this tax year, then he would almost certainly overpay tax - see http://adviser.royallondon.com/pensions/technical-central/information-guidance/benefit-options/emergency-tax-and-lump-sum-withdrawals/

xylophone

It would be optimal if he took a total of £10,600 (ie used up all his personal allowance).

Standard PA 2016-17 is £11,000.

ex-pat_scot

xylophone wrote: »

Standard PA 2016-17 is £11,000.

Apologies - I am a year out of date. You are correct


https://www.gov.uk/government/publications/tax-and-tax-credit-rates-and-thresholds-for-2016-17/tax-and-tax-credit-rates-and-thresholds-for-2016-17

tgon

I was told to complete a P55 form, "Claim a tax refund when you've flexibly accessed part of your pension". I dont know when it can be submitted - the first time I pay tax or at the end of the tax year. Similar to above but as I dont have a current years P45 I was told I need to fill in this form claim back for income drawn down (not lump sum) below my allowance. I think I was told that I would be on an emergency tax code but all should be well and tax free by the end of the tax year. As I've no intention of exceeding income above my allowance its a pity I have to pay then reclaim by default.

Linton

The first payment of any money your husband draws down above the initial tax free 25% will be charged 20% tax as HMRC will not yet have allocated a tax code. By the time any subsequent payments are made if the tax code is correct the tax paid should be correct and any excess would be refunded. Everything would be sorted out at the end of the tax year anyway.

There is a form to get early repayment of the first 20% tax deduction - see here.

jamesd

You can claim as soon as you have the money. The fastest route is probably online via your Personal Tax Account which has a processing target of 30 days to payment from the date of application. You have an account there even if you didn't know about it until now.

The form option to reclaim immediately came about as a result of feedback from people to HMRC about it being undesirable to make people to wait until the end of the tax year. Online or paper form and 30 days is the improvement that resulted.

tgon

jamesd wrote: »

The form option to reclaim immediately came about as a result of feedback from people to HMRC about it being undesirable to make people to wait until the end of the tax year. Online or paper form and 30 days is the improvement that resulted.

I wish Pension Wise had said this to me last week. Thanks jamesd

jamesd

Don't expect exactly 30 days, though kit does vary. Last number I saw was that it was taking about 35 days but that's from a year or so ago.