Paying tax when not earning enough

Rolyan

I have just retired.  My only income this year will be £37 from my last payslip in May, £3.5k annual pension paid monthly which is starting soon and a lump sum pension pot of £6.5k paying shortly.  The pension person said they will deduct tax at source (after taking the 25% tax free, they will tax the remaining balance).
Is there a way of avoiding paying tax on the pension and on the lump sum, as it’s below the personal allowance, or will I end up paying tax then having to claim it back at the end of the tax year in 2021.
I just wonder if there’s general advice on here before I contact the tax man.  Forewarned is forearmed and all that.

molerat

The lump sum pension is unavoidable being taxed as that is how they have to do it by the rules unless they already have a tax code for you but you can reclaim it as soon as it is paid.  The monthly pension needs to have a tax code allocated so once you have the "employer tax details" of the pension payer HMRC can allocate some of your allowance there. Most of this can be done through your on line tax account. Have you reached state pension age yet ?

Linton

You cannot avoid the tax on the first ever taxable payment from a pension provider - HMRC dont know you exist as an "employee" until that happens.
You can recover the tax on the lump sum payment fairly quickly with the appropriate form: see https://www.gov.uk/government/publications/income-tax-repayment-claim-when-small-pension-taken-as-a-lump-sum-p53

squirrelpie

molerat said:

The lump sum pension is unavoidable being taxed as that is how they have to do it by the rules

That doesn't sound right. Lump sums are normally tax free, no?

Have you reached state pension age yet ?

It seems unlikely otherwise they would probably be claiming state pension and thus have other income. But I expect it is worth double-checking.

Albermarle

Some confusion here I think over the phrase 'lump sum' ?
If it is the TFLS - Tax free lump sum, sometimes called PCLS - Pension Commencement lump sum , then it will be paid without any tax being deducted . 
However taking a lump sum from a pension can also mean just taking a one off payment at any time , or even taking the whole pension as a lump sum ( where possible ) . IN which case it would at least be partly taxable. 
Of course the remaining regular pension is potentially taxable and probably some tax will be taken until the correct tax code is applied . Then any tax paid could be reclaimed. 

xylophone

lump sum pension pot of £6.5k paying shortly.  

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

Rolyan

Thanks for the replies so far.  To clarify a few details:
1) I haven’t reached state pension age yet (I’m 62).  

2) When I refer to the lump sum, I mean the small defined contribution pension that is currently worth £6.5k I total.  I’m taking 100% of that as a one off ‘lump sum’.  So they will give the first 25% of that tax free, but then tax the remaining 75%.
3) On the other larger defined benefit pension, Im getting that as an annuity.  So I’ve taken a 25% lump sum tax free, and it then pays just under £300 month.  

So I’m trying to determine if the £6.5k and the £300 month can be paid without being taxed.

Also, final question, I have 3 private pensions in total.  The 2 above and a third one which I’m not taking yet.  Is there a limit to the number of pensions that you can take a tax free lump sum from.  When I come to take the third one in a year or so, will there be any problems with me having already taken the 2 lump sums above.

I do appreciate all the help and I understand if people simply say ‘contact a financial advisor’

AlanP_2

Rolyan said:

Thanks for the replies so far.  To clarify a few details:
1) I haven’t reached state pension age yet (I’m 62).  

2) When I refer to the lump sum, I mean the small defined contribution pension that is currently worth £6.5k I total.  I’m taking 100% of that as a one off ‘lump sum’.  So they will give the first 25% of that tax free, but then tax the remaining 75%.
3) On the other larger defined benefit pension, Im getting that as an annuity.  So I’ve taken a 25% lump sum tax free, and it then pays just under £300 month.  

So I’m trying to determine if the £6.5k and the £300 month can be paid without being taxed.

Assuming you have a standard £12500 personal allowance then yes, all tax free as the taxable amount falls below £12,500.

Also, final question, I have 3 private pensions in total.  The 2 above and a third one which I’m not taking yet.  Is there a limit to the number of pensions that you can take a tax free lump sum from.  When I come to take the third one in a year or so, will there be any problems with me having already taken the 2 lump sums above.

You can take 25% TFLS ftrom each and every DC pension you have.


I do appreciate all the help and I understand if people simply say ‘contact a financial advisor’

Hope that helps.

molerat

Being within your tax allowance with no tax due and actually being taxed are entirely separate.  As I said, there is no way of avoiding the small pot lump sum from being taxed, it is how the system works and they will not change it in your circumstances, but you can reclaim the tax almost immediately.  The monthly payments will likely initially be taxed until you can get a tax code set up and that tax will then be returned through the PAYE system.

Rolyan

AlanP_2 said:

Rolyan said:

Thanks for the replies so far.  To clarify a few details:
1) I haven’t reached state pension age yet (I’m 62).  

2) When I refer to the lump sum, I mean the small defined contribution pension that is currently worth £6.5k I total.  I’m taking 100% of that as a one off ‘lump sum’.  So they will give the first 25% of that tax free, but then tax the remaining 75%.
3) On the other larger defined benefit pension, Im getting that as an annuity.  So I’ve taken a 25% lump sum tax free, and it then pays just under £300 month.  

So I’m trying to determine if the £6.5k and the £300 month can be paid without being taxed.

Assuming you have a standard £12500 personal allowance then yes, all tax free as the taxable amount falls below £12,500.

Also, final question, I have 3 private pensions in total.  The 2 above and a third one which I’m not taking yet.  Is there a limit to the number of pensions that you can take a tax free lump sum from.  When I come to take the third one in a year or so, will there be any problems with me having already taken the 2 lump sums above.

You can take 25% TFLS ftrom each and every DC pension you have.


I do appreciate all the help and I understand if people simply say ‘contact a financial advisor’

Hope that helps.

It all helps :-)

re the question about paying it without tax, I know that it won’t ultimately be taxed. But I’m getting the impression that it will start off being taxed and I will have to claim this back. So I wondered if there is a simple way to avoid paying tax from day one. Rather than getting into a drawn out debate with the tax man about claiming it back. 

sparky0138

molerat said:

The lump sum pension is unavoidable being taxed as that is how they have to do it by the rules unless they already have a tax code for you but you can reclaim it as soon as it is paid. 

Is there a way of reclaiming as soon as it's paid if you're going to take another lump sum before the end of the tax year?