Being taxed on income when lacking a proper taxcode

Milarky

I intend to take a lump sum amount from my new-opened 'drawdown' account (opened after payment of the T/F lump sum which has just occurred) in respect of 2018/19 that should not be taxed due to my income this year. No earnings from employment this year or last so that HMRC only has record of 2017/18 self assessment income, none of which is earned-income.


From the provider they will apply emergency rate tax to this lump w/o a current tax code. A tax code 'should' follow sometime thereafter such that subsequent drawdown is 'taxed' appropriately (hopefully all under the allowence as envisaged.)


So the question is (probably one for the tax forum...) what is emergency rate tax on pensions ('income') payment and how is it recoverable by the indvidual? (Self assessment at year end or via dedicated claim?)



Thnx

Dazed_and_confused

Depending on the amount of taxable income the tax rates used will be a mix of 0, 20, 40 and 45%.

Can you say what the amount will be? Anything upto £988 would result in no tax being deducted.

If you complete a Self Assessment tax return then their is no tax to reclaim as such. You simply include the income (and tax) on your Self Assessment return and it forms part of your Self Assessment calculation. If the tax deducted results in an overpayment of tax it will be refunded to you (assuming you request a refund by completing the relevant part of the return).

If you don't complete a return then HMRC will review your tax position for the year between May/June and the autumn and refund any tax overpaid. If you don't want to wait for your turn in the queue you can always ask them to review your case earlier.

xylophone

https://adviser.royallondon.com/technical-central/pensions/benefit-options/emergency-tax-and-lump-sum-withdrawals/

Milarky

Thanks for the prompt replies fellas.

@Dazed and confused I asked about a figure of '10k' and was quoted three thousand and something. Couldn't understand that but it's all explained in the Royal London information (which is an excellent source btw)

@xylophone Awesome! thanks for that link it answers my question precisely

Dazed_and_confused

The tax on £10,000 would be £3,029.40.

Taking £10,000 all in one month is the equivalent of £120,000/annum so after the months tax free element (£988) you will be paying some 20% and some 40% tax to get to the £3029.40.

A good incentive to file your Self Assessment return early if that will be more tax than is ultimately due.

squirrelpie

Taking £10,000 all in one month is the equivalent of £120,000/annum

Only if the £10,000 is taken in April. If it's taken in May there are only eleven months left in the tax year so it's equivalent to £110,000/annum and so on. And for the most common case that the payment is taken in March it's equivalent to £10,000/annum.


The way HMRC currently applies emergency tax rules would be called criminal if it were non-government people doing it, IMHO.

Dazed_and_confused

The way HMRC currently applies emergency tax rules would be called criminal if it were non-government people doing it, IMHO.

The same way emergency tax has always been applied as far as I'm aware.

Can you think of a better alternative?

Which wouldn't result in more people ending up owing tax rather than being owed repayments?

Reluctantpensioner

Taking £10,000 all in one month is the equivalent of £120,000/annum

Only if the £10,000 is taken in April. If it's taken in May there are only eleven months left in the tax year so it's equivalent to £110,000/annum and so on. And for the most common case that the payment is taken in March it's equivalent to £10,000/annum.

Not always, I'm afraid, squirrelpie.
I did a £40K UFPLS last year in March and was taxed as if it were £480K, so at 45% tax with zero annual allowance! May depend on your pension supplier.
The good news: you can fill in an electronic form (P55) and they refunded really quickly.

Reluctantpensioner

Oh, and having a tax code or not doesn't actually matter. The pension provider has to use emergency tax processes anyway.