Deferred pension lump sum tax

BarGin

In September 2016 I deferred the state pension I had been receiving and I restarted it in January 2018. During the deferral period my income was below the threshold for paying income tax.

In January last year I was given the option of a lump sum or an increased pension. I opted for the lump sum as I had been saving it for a house purchase. I was told that as I had not been paying tax the lump sum would be tax free and they paid me the full amount (over £14,000).

A year later, I have just received a tax demand for £2,800. Does this sound right? Any advice much appreciated.

Linton

If your taxable income excluding the SP lump sum in the 2017/2018 tax year was below your tax allowance then you should not have been charged tax for an SP lump sum taken in that year. So a slight change to what you said - what is important is what happened in the whole tax year, not the deferral period.

p00hsticks

My understanding is that it's the tax band you fall into at the time you take the lump sum that is important, not that for the period at which it ws deferred.

DWP deduct tax from the sum at the rate you tell them is applicable, but should have informed you that HMRC can later correct this if it turns out not to be accurate.

So what was your total income (excluding the lump sum) for tax year 2017-18 ? Was it more that the tax allowance ?

p00hsticks

Linton wrote: »

If your taxable income excluding the SP lump sum in the 2016/2017 tax year was below your tax allowance then you should not have been charged tax for an SP lump sum taken in that year. So a slight change to what you said - what is important is what happened in the whole tax year, not the deferral period.

Your post crossed with mine and is broadly the same - but I've assumed that when the poster refers to 'last January' he means January 2018 - so the relevant tax year is surely 2017-18 ?

Linton

p00hsticks wrote: »

Your post crossed with mine and is broadly the same - but I've assumed that when the poster refers to 'last January' he means January 2018 - so the relevant tax year is surely 2017-18 ?

Yes, I was thinking about when the deferral started which is obviously irrelevent. Will correct.

Dazed_and_confused

I restarted it in January 2018. During the deferral period my income was below the threshold for paying income tax.

That is irrelevant as far as taxation of the lump sum is concerned

I was told that as I had not been paying tax the lump sum would be tax free and they paid me the full amount (over £14,000).

Whoever told you that was wrong. What happened during the deferral period has no relevance to the tax due (or not) on the lump sum.

It is your tax position in the year of the lump sum payment which matters. And from January 2018 you were receiving additional income from your State Pension which could easily have moved you from having income less than your Personal Allowance to exceeding it.

BarGin

They have assessed my income for the 2017-18 tax year including the lump sum paid in February to be £21,000. My tax allowance was £11,500. So apart from the lump sum I wasn't paying any income tax.

Dazed_and_confused

What correspondence have you received from HMRC?

You have to ignore the lump sum initially. It is everything else which determines the tax rate applicable to the lump sum. So if your taxable income was only £7,000 then I would expect the tax due on the lump sum to be £0.

Something seems wrong somewhere

xylophone

https://www.litrg.org.uk/tax-guides/pensioners-and-tax/what-tax-do-i-pay-my-state-pension-lump-sum

https://www.taxadvisermagazine.com/article/lump-sums

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim74651

BarGin

Dazed_and_confused wrote: »

What correspondence have you received from HMRC?

I received an email today telling me my tax code had changed for one of my private pensions. I then logged into the website to check and was presented with the headline that I owe £2,800 for the 2017-18 tax year.

My income was £6,870 from private pensions. I also received £1,400 of untaxed interest. I assume the first £1,000 of this is tax free.

Dazed_and_confused

I assume the first £1,000 of this is tax free.

No. ISA's are "tax-free" but normal bank interest is all taxable. There is no £1,000 "allowance" and you have to have a lot more income than you have to be able to utilise the savings nil rate (confusingly known as the Personal Savings Allowance).

There would be no tax payable on the £1,400 untaxed interest because you have spare Personal Allowance.

If your private pension income was say £11,500 then the interest would all be taxed but at the savings starter rate of tax. Which is a maximum of £5,000 taxed at 0%. The savings nil rate (PSA) is only available after you have exhausted the Personal Allowance and, if applicable, the savings starter rate of tax.