Tax when taking small pot

PensionSort

Hello,

My siltation is very simple - I am 56 , not working and have a small SIPP which I am hoping to take under the small pots rule this financial year (<10k) . This will be the first time I have taken a lump sum and as I am not working all this money falls below my personal allowance so no income tax is due. (I will not to be working in 2019/2020).

i was hoping to get this done in this financial year (2018/2019) - but that seems unlikely.

As I am taking a lump sum for the first time my understanding is that they will deduct tax at the basic rate (currently 20%) I will then need to settle any overpaid tax with HMRC directly.
(I will double check this with them)

So to simplify say i claim the small pot (10k) start of 2019/2020 - I get 8k (after 2k taken in tax). I would then have to claim this 2K back from HMRC.
How soon could I do this ? - Do I have to wait until the end of 2019/2020 or can I claim it now as I am not working?

Thanks

Brynsam

You don't have to wait until the end of 2019/20 - but you can't claim it 'back' until you've paid it. When you have, you can claim as soon as you like: https://www.gov.uk/claim-tax-refund

xylophone

You have never taken a Pension Commencement Lump Sum from this arrangement?

You are taking the whole of the pension in April (on or after 6th) 2019?

The Personal Allowance will be £12,500.


You should get £2500 of your (say) £10,000 tax free - the balance is taxable as income in the year of receipt.

The likelihood is that you will then receive 1/12 x £12500 tax free (£1041), with the rest taxed at 20%.

Thus £2500 + (approx)£1041 + (80/100 x (approx)£5167).

It seems that this will lead to an overpayment of (approx) £1291 in your case so you can contact HMRC for a refund.

https://www.gov.uk/government/publications/income-tax-repayment-claim-when-small-pension-taken-as-a-lump-sum-p53

Dazed_and_confused

As I am taking a lump sum for the first time my understanding is that they will deduct tax at the basic rate (currently 20%)

That would be unusual for a first payment. Pension companies usually use the emergency tax code on a non cumulative basis.

So if your pot was £10k you have £2.5k TFLS and tax would be calculated on the £7.5k taxable income.

As this equates to c£90k on am annualised basis the tax deducted from the £7.5k would normally be £1,958. So the actual payment you will receive from the pension company will be c£8,042. Similar to what you were expecting but for totally different reasons.

Whether you are "working" or not is irrelevant really. It is your total taxable income which matters. But if that is just the £7,500 from this pension fund then you would be due a refund of the tax deducted. HMRC would refund this automatically (assuming you don't file Self Assessment returns) but that would only be in Summer of 2020 so you would be better claiming a refund yourself in this situation, once the payment has been made by the pension company.

PensionSort

Thanks for the help