Income tax on pensions

Albermarle

Hi,
Currently I am still working but starting to think ahead about all the possible ways to use various DC pots I have ( + one DB pot and then the SP a bit later ). The question came in my mind about how income tax is actually taken, when you have various sources of income from different pension providers . In other words how is it all coordinated so HMRC get the correct amount?
With some googling I can see that each provider gets a different tax code ( probably an emergency one to begin with ) and one of them takes the SP into account.
I have the impression it could all get complicated to follow, with numerous tax codes that could change every year, depending on how much you take , on how you took some of the pensions and must be a good possibility of errors.
Am I overcomplicating the situation ? and would it be a good idea to combine DC pots ( all other things being equal) to simplify the tax situation in retirement? Thnks in advance for advice , especially from anyone taking pensions from multiple sources.

zagfles

Works the same way as people with multiple jobs. Generally the main job/pension would have a normal tax code including the personal allowance, others would have a tax code like BR meaning everything is taxed at 20%. This generally works OK provided the main job/pension earns enough to use up your personal allowance and the others don't push you into higher rate.

squirrelpie

With some googling I can see that each provider gets a different tax code ( probably an emergency one to begin with ) and one of them takes the SP into account.

You've got the general idea but it works out slightly differently. The SP is paid without any tax being taken, so HMRC allocates part of your allowance to that. The allowance that is left over is then generally allocated to one pension and the rest get taxed at basic rate (BR) unless you're lucky enough to have too much income for basic rate to apply. You can discuss how your tax code is allocated with HMRC; in your case I would expect it to make sense to allocate the rest of your allowance to the DB pension, for simplicity. Then things will be pretty automatic, but you do need to keep an eye on it all to make sure the correct amount of tax is being taken if you want to avoid unexpected bills in the future.



Whether it is sensible to put your DC pots together depends on whether any of them have special conditions such as guarantees or restrictions on drawdown, plus fee rates and investment performance and last but not least, your own appetite for managing a bunch of pensions.


FWIW, I get SP and one DB allocated as above and a few years ago I chose to consolidate my various DC pots.

GibbsRule_No3

I would not expect them to work it out for a couple of years either. So they might take to much for a couple of years and then find they owe you the year after. It looks like it takes awhile for it to settle down to regular correct payments. Mine should not have been that complicated, one job for 47 years (how wrong was I to think that!) when I started taking my pension and doing a three day week the past three tax code info sheets have been adjusted. I'm hoping that by the 2022 tax year, when I will only have SP and works pensions (two different kinds from the same job) it will have sorted itself.

Albermarle

Thanks for the replies Just to make sure I have understood , I will use a theoretical example :
Take DB pension of £15K at say age 63 . HMRC allocate personal allowance to that and I pay 20% on anything above that. ( assuming no other taxable income )
One year later take the tax free cash from a dc pot and start to take an income from the rest . I pay 20% on all that income .
At 66 SP of approx. £8K pa is paid and then my personal allowance for the DB pension is reduced by £8K .
Is that right ?

zagfles

Albermarle wrote: »

Thanks for the replies Just to make sure I have understood , I will use a theoretical example :
Take DB pension of £15K at say age 63 . HMRC allocate personal allowance to that and I pay 20% on anything above that. ( assuming no other taxable income )
One year later take the tax free cash from a dc pot and start to take an income from the rest . I pay 20% on all that income .
At 66 SP of approx. £8K pa is paid and then my personal allowance for the DB pension is reduced by £8K .
Is that right ?

Yes that sounds right.

badmemory

The thing about tax is it is best to be pro-active. After all if you don't know what your income is likely to be how can you expect HMRC to, they have their faults but they cannot be expected to be psychic.


So when you have multiple sources of income you need to figure these & their totals out. Make sure that every income source has an appropriate tax code. If one income cannot use all your remaining allowance then have HMRC split it so that you pay some tax on all sources. This stops you from overpaying if the allowance is too high on one source.


If you are concerned how to split it then come here & someone will help. If you are going into 40% territory then make sure your tax code allows for that.


Remember the ad that said tax isn't supposed to be taxing? Unfortunately the gov website seems at times to make it difficult, but knowledge is power.