Tax on drawing pension

AlanRoberts29

A bit of maths advice, please 🤔

I have a Standard Life Sustainable Multi-Asset (AP) Pension Fund that has had no contributions for around 10 years since I left the company it was started with.

I am able to withdraw it in June this year and its value today is £34000 I am currently employed earning £30000 a year. How much tax would I pay withdrawing the full £34000?   

molerat

How much tax will be due and how much tax will be deducted are 2 entirely different things.

A tax code of 1257LM1 will be applied and tax of £9749.61 will be deducted.

But over the year on the total of your £30K income and £25.5K taxable pension tax of £9628 is due.

Your income would normally attract £3484 tax. 

You will have paid a total of £13233.61 tax so would need to reclaim the excess £3605.61.

Be aware that taking that pension may make you a higher rate tax payer so could have knock on effects there.

And withdrawing any taxable amount will trigger the MPAA so limiting you to contributing £10K pa  (increased from the current £4K) to a money purchase pension in the future (which may be reduced if a Labour government gets back in power)

sheslookinhot

Withdrawing £34000 will result in a tax deduction of £13,600.

Dazed_and_C0nfused

sheslookinhot said:

Withdrawing £34000 will result in a tax deduction of £13,600.

It honestly wouldn't.

25% would the TFLS and then the emergency tax code would be applied so the taxable element would have a mix of 0%, 20%, 40% and 45% tax deducted.

I'm sure @molerat is correct with £9749.61 (deduction).

xylophone

Let's assume the OP withdraws the whole of the pension in tax year 2023/4 when his salary is £30,000 and that he has no other income. 

25% of the £34,000 would be tax free (Pension Commencement Lump Sum).

£34000 - £8500  = £25,500.

His  income for the year is  £25,500 + £30,000 = £55,500.

His  tax free PA is £12,570.

£55,500 - £12,570 = £42,930

Of that,  £37,700 is taxable at 20%. (£7540)

£5230 is taxable at 40%. ( £2092).

He owes £9632 in tax for the year.

But because of the way that pension withdrawals of the type proposed are processed, he will have overpaid tax on the pension withdrawn.

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

Above shows the calculation and gives details of how to reclaim overpaid tax.

sheslookinhot

Dazed_and_C0nfused said:

sheslookinhot said:

Withdrawing £34000 will result in a tax deduction of £13,600.

It honestly wouldn't.

25% would the TFLS and then the emergency tax code would be applied so the taxable element would have a mix of 0%, 20%, 40% and 45% tax deducted.

I'm sure @molerat is correct with £9749.61 (deduction).

Yes, I forgot about the 25% tax free

Albermarle

AlanRoberts29 said:

A bit of maths advice, please 🤔

I have a Standard Life Sustainable Multi-Asset (AP) Pension Fund that has had no contributions for around 10 years since I left the company it was started with.

I am able to withdraw it in June this year and its value today is £34000 I am currently employed earning £30000 a year. How much tax would I pay withdrawing the full £34000?   

Just because you can withdraw it, does not mean it is necessarily a good idea.
It might come in handy for when you stop working ?

Dazed_and_C0nfused

Albermarle said:

AlanRoberts29 said:

A bit of maths advice, please 🤔

I have a Standard Life Sustainable Multi-Asset (AP) Pension Fund that has had no contributions for around 10 years since I left the company it was started with.

I am able to withdraw it in June this year and its value today is £34000 I am currently employed earning £30000 a year. How much tax would I pay withdrawing the full £34000?   

Just because you can withdraw it, does not mean it is necessarily a good idea.
It might come in handy for when you stop working ?

So so true 😂

Or at the very least spread over two tax years so you avoid (ultimately) paying any higher rate tax.

AlanRoberts29

xylophone said:

Let's assume the OP withdraws the whole of the pension in tax year 2023/4 when his salary is £30,000 and that he has no other income. 

25% of the £34,000 would be tax free (Pension Commencement Lump Sum).

£34000 - £8500  = £25,500.

His  income for the year is  £25,500 + £30,000 = £55,500.

His  tax free PA is £12,570.

£55,500 - £12,570 = £42,930

Of that,  £37,700 is taxable at 20%. (£7540)

£5230 is taxable at 40%. ( £2092).

He owes £9632 in tax for the year.

But because of the way that pension withdrawals of the type proposed are processed, he will have overpaid tax on the pension withdrawn.


Above shows the calculation and gives details of how to reclaim overpaid tax.

When does that tax get taken, is it when you withdraw from the pension pot, and will it be the full £9632?

Dazed_and_C0nfused

If you take more than £1048 then some tax will be deducted from the pension.

Depending on the exact scenario this might be more or less than is a really due so there will often be some settling up to do once the final position can be calculated after the end of the tax year.

Large first withdrawals tend to result in more tax being deducted than is really due so a refund is made by HMRC. 

AlanRoberts29

Dazed_and_C0nfused said:

If you take more than £1048 then some tax will be deducted from the pension.

Depending on the exact scenario this might be more or less than is a really due so there will often be some settling up to do once the final position can be calculated after the end of the tax year.

Large first withdrawals tend to result in more tax being deducted than is really due so a refund is made by HMRC. 

So Standard Life will already deduct tax before transferring over to my bank account and then any more the tax then I need to fill in the forms to get a refund.