Tax when taking small pension pot

slowly_recouponing

Hello,

I had two small incomes last year. The state pension and a small pension pot (£4,330) which was taken in whole. £650 in tax was deducted from the £4,330 by the pension provider and I received the rest.

I've spoken to HMRC who said my tax is worked out by adding the state pension to the entire small pension pot, including its 25% tax free amount (so £4,330) before taking off the £11k personal allowance.

Obviously if that's the correct way then no issues at all... but I just wasn't sure that the 25% gets added back in when calculating taxable income?

Thank you for any help you can give.

molerat

The notes for completion of the tax return under pensions states "It also includes the taxable part of" so the 25% is not used in your tax calculation and should not be entered. The reclaim form states "the taxable part of the small pension taken as a lump sum"

badmemory

A pension provider taxing a full pension pay out will tax it all as if received in month one of the tax year. That is as if you are going to receive that amount for every month of the year. So take three quarters of your pension pot and add your state pension. Take off your personal allowance of £11000. Divide this by 5 (that's 20% tax). If that number is £650 then it is right. This would mean that your income for last year was approx £14250 plus the tax free lump sum.

If not write to HMRC & tell them. Preferably with a copy of the P45 which the pension provider SHOULD have sent to you.