Tax code and Pension small pot query

stephsirr

Like many people, I took a pay cut due to Covid.  I had to take just under £9k out of a small pot pension.  Paid £1334 at source in tax (i.e. that was paid direct from pension company and I have the paperwork).  It appears HMRC thinks I owe another £2,968 in tax on the same amount. I think it's an error but not clear what to change on Tax Code. I am a higher rate TP.   Not quibbling with paying tax but 48% seems unlikely.  Can someone advise?   If I'm paying into a pension I can take the difference in basic and higher through tax code but not sure how it works the other way around and not finding specific info on websites.   
TIA

Albermarle

HMRC will automatically consider the £9K as a monthly payment that will be repeated for the remaining months of the tax year .They then tax you on that basis , so on a much higher income than reality . All the excess tax paid will come back to you at some point when the calculation for the tax year is done, or maybe sooner if you contact them directly .
On another point are you aware that by taking this small pot , you are limited in future to maximum £4K pa contribution to your pension? As a higher rate taxpayer saving into a pension gives great benefits , which are now restricted for you.

Dazed_and_C0nfused

I suspect you have misunderstood something connected with the £2,968.

Is that the tax apparently owed or an adjustment to your tax code to collect some tax owed?

Was the £9k the taxable amount?

stephsirr

It's the adjustment to my tax code for next year, showing under Deductions.   Yes, £9k was the taxable amount (or just under by the time they released the funds, £8,800 I think)

Dazed_and_C0nfused

As a higher rate payer that £8,800 will cost you £3,520 in tax.

£1,334 was deducted when the payment was made leaving £2,186 to pay.

Is the adjustment to your current tax code for 2020:21 or 2021:22?

If 2021:22 then it would normally collect an extra £1,187.20 (£2,968 x 40%).

So a bit more detail is needed to understood the full picture.

Marcon

Albermarle said:

On another point are you aware that by taking this small pot , you are limited in future to maximum £4K pa contribution to your pension? As a higher rate taxpayer saving into a pension gives great benefits , which are now restricted for you.

If this is truly a small pot (i.e. under £10K for the whole original pot) and taken on that basis, the £4K restriction isn't activated. Encashing a small pot pension (up to 3 times for personal pensions) doesn't trigger the MPAA.

stephsirr

Marcon said:

Albermarle said:

On another point are you aware that by taking this small pot , you are limited in future to maximum £4K pa contribution to your pension? As a higher rate taxpayer saving into a pension gives great benefits , which are now restricted for you.

If this is truly a small pot (i.e. under £10K for the whole original pot) and taken on that basis, the £4K restriction isn't activated. Encashing a small pot pension (up to 3 times for personal pensions) doesn't trigger the MPAA.

Thank you for confirming, that is the advice I had at the time :-) 

stephsirr

Dazed_and_C0nfused said:

As a higher rate payer that £8,800 will cost you £3,520 in tax.

£1,334 was deducted when the payment was made leaving £2,186 to pay.

Is the adjustment to your current tax code for 2020:21 or 2021:22?

If 2021:22 then it would normally collect an extra £1,187.20 (£2,968 x 40%).

So a bit more detail is needed to understood the full picture.

For next year's tax code and yes, that's the kind of sum I was expecting.  It's only changed this week, perhaps I'll leave it and it will right itself!  Impossible to reach a human at the tax office.  Presume now it's really just earnings isn't it so nothing to do with tax benefit on other pension contributions.

Marcon

stephsirr said:

Marcon said:

Albermarle said:

On another point are you aware that by taking this small pot , you are limited in future to maximum £4K pa contribution to your pension? As a higher rate taxpayer saving into a pension gives great benefits , which are now restricted for you.

If this is truly a small pot (i.e. under £10K for the whole original pot) and taken on that basis, the £4K restriction isn't activated. Encashing a small pot pension (up to 3 times for personal pensions) doesn't trigger the MPAA.

Thank you for confirming, that is the advice I had at the time :-) 

Just to complete the picture for others reading this thread, pensions which are cashed in on the basis they are 'small pots' don't use up your Lifetime Allowance (LTA), so in effect can be used to increase your LTA.