Deferred pension lump sum tax

xylophone

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

What tax do I pay on my state pension lump sum?
Put simply, the rate of tax that will be used on your state pension lump sum is generally the highest rate that applies to your other income for that tax year.

All else being equal, this is intended to avoid the lump sum (or part of it) being taxed at a higher rate than you would have paid had you not deferred it. However, the rules may not necessarily give that result.

It is important to bear in mind that when you are looking at your ‘other income’ you must ignore the 0% rates which are used to tax savings and dividend income, i.e. the starting rate for savings, the savings nil rate (or personal savings allowance) and the dividend nil rate (or dividend allowance). In other words, the question is what is the highest rate of tax which would apply if income falling in these 0% rates were taxed at the normal rates. This can make a significant difference to the tax payable on the lump sum.

Dazed_and_confused

My income was £6,870 from private pensions. I also received £1,400 of untaxed interest.

You definitely need to contact HMRC. You should have had a calculation explaining how they arrived at the £2,800.

In the absence of this the only logical explanation I can think of is that they believe you had more income in 2017:18.

If you only had £8,270 taxable income then i cannot think of any circumstance where you would be liable to pay 20% tax on the State Pension Lump Sum.

BarGin

Thanks for all the replies. I am now sure I should not have to pay the demand. I will try phoning again on Monday.

mgdavid

Dazed_and_confused wrote: »

You definitely need to contact HMRC. You should have had a calculation explaining how they arrived at the £2,800.

In the absence of this the only logical explanation I can think of is that they believe you had more income in 2017:18.

If you only had £8,270 taxable income then i cannot think of any circumstance where you would be liable to pay 20% tax on the State Pension Lump Sum.

Nobody's mentioned the SP paid after the restart and up to April 5th 2018 yet. Could be another £1.5k - £2k, but I still don't think it busts the £11500 PA.

Dazed_and_confused

It was mentioned in post #6 but the op is adamant their only income is £8,270.

Personally I am doubtful £8,270 is the op's only income but it would be a particularly large weekly State Pension amount to take them over £11,500.

Or maybe they had applied for Marriage Allowance and the threshold was just £10,350??

BarGin

An update for those who were kind enough to advise me.

The problem is related to the amount of SP I received after claiming the lump sum. HMRC claim I received over £4,000 whereas the actual figure was under £2,500 according the Pensions Service. Apparently they don't talk to each other so the Pensions service are writing to me and I then have to forward it to HMRC.

The lower figure keeps me within the allowance so I should not have to pay the tax.

BarGin

I now have the following accurate figures:

Total income not including lump sum £10,750
Personal Allowance £11,500
State Pension lump sum £14,135

I have spoken to them again this morning and they are adamant I owe them tax on £13,385 which equals £2,677.

Is there anything else I can say to them?

Dazed_and_confused

Have you applied for Marriage Allowance for the year in question?

Are the figures you quote from the HMRC calculation?

As I understood it the State Pension lump sum is taxed in its entirety, you either have to pay nothing, 20%, 40% or 45%.

You cannot use your spare Personal Allowance against the lump sum so you cannot owe them tax on £13,385. It would be no tax due on it or tax due on the whole £14,135.

Maybe best to ask to speak to someone more senior?

Dazed_and_confused

Extra thought, the £10,750 you quote definitely does include the £1,400 interest referred to in a previous post?

If not you have a problem!

BarGin

I posted a letter of appeal on Friday but had to speak to them today about this tax year. I am not married and yes the interest is included.