Tax on pension lump sum?

liketoknow

I have a small pension from years ago which I have been told I can draw 25% of. A friend of mine has said that I would be charged 40% tax on this, is that true if by adding that amount to my income it is still below the personal tax allowance. It seems an awfully high amount of tax to be paid.

molerat

It will be taxed as part of your normal income so if your total income for the year, including the pension, is below your personal allowance then you will pay no tax on it. It may be taxed on an emergency basis at payment but any overpayment can be reclaimed.

liketoknow

Thanks, that is what I thought.

HappyHarry

liketoknow wrote: »

I have a small pension from years ago which I have been told I can draw 25% of. A friend of mine has said that I would be charged 40% tax on this, is that true if by adding that amount to my income it is still below the personal tax allowance. It seems an awfully high amount of tax to be paid.

It's quite likely that the 25% you mentioned is the tax-free lump sum part of the pension, which, as named, is tax-free.

molerat

Sorry, I misread. The 25% is tax free whatever your income. The remaining 75% is taxable as part of your income.

liketoknow

Thank you Happy Harry. that's even better although It wouldn't take me over my personal allowance unless I suddenly started doing a lot more work which is very unlikely!!
I need a new car and I thought I might draw it but if I do that at the moment, I will have to then start drawing the pension which I did not want to do yet.

liketoknow

Thanks, either way it looks as though my friend is wrong and I won't have to pay tax, it was the 40% that bothered me, that is an awful lot to pay on a low income anyway.