Small pot - numbers correct re Tax ?

deejaybee

Hi all,

Considering taking a DC fund as a "small pot " in near future.

Will be around £ 7K, so ill use that figure for now.

I am assuming £1750 Tax Free lump sum , and the remainder (  £ 5250 ) would be taxed at 20 % ?  as i am a normal rate taxpayer.

Giving me 1750 + 4200 = 5950 ?  Does that all sound ok ?

Plus if i time it right regarding Tax Year, i might be able to get some or all of the tax refunded ?  Is that an easy process, and would i have to wait until the end of the tax year that i took the payment ?  Currently self-employed, so obviously in the self-assessment system.

Thanks !

Linton

The amount you receive after tax should be as you say £5950 with £1050 tax assuming the lump sum doesnt put you into the higher rate tax band.

As I understand it.........

Because of the way PAYE works the tax actually taken will probably be wrong:

As this pension payment is your first ever income from this "employer" you will be taxed on the emergency tax code 1257/M1.  That means that your tax allowance and higher rate band will be divided by 12 and the tax worked out purely on that month.

Tax allowance for that month = 12570/12=£1048
Higher rate band=£50271/12=£4189

So with a lump sum of £5250 that would mean £1048 zero tax, £1061 at higher rate and £3141 at basic rate giving tax taken of £1061 X 0.4 + £3141 X 0.2 = £1052

So the  total paid to you will be £1750+(£5250-£1052)=£5948.  So within a £ or so for rounding errors your tax will actually be correct and no refund due if my maths is right.

Albermarle

Plus if i time it right regarding Tax Year, i might be able to get some or all of the tax refunded

You have said you expect to pay some tax on the pension payment, so why would you then get it refunded ?

What can happen is that too much tax may be taken on the one off payment, and this would be taken into account in your self assessment. 

deejaybee

Thanks  both for your feedback - much appreciated .

Dazed_and_C0nfused

Currently self-employed, so obviously in the self-assessment system

Just think of the tax deducted by the pension company as provisional.

The actual tax due will be determined when you file your Self Assessment return for the tax year in question 

If you owe extra it's simply part of your Self Assessment liability.  

If you paid too much on the pension then it reduces the tax owed on your self employment.  Or you get a refund from HMRC if the overall result for the whole tax year is that you've overpaid tax.

deejaybee

TY D and C