Reducing exposure to higher rate tax on retirement...

keep_it_simple2

Hello All,
Looking for some advice if possible.

I'm currently employed and pay 40% tax.  I am due to retire shortly and claim an occupational pension. (Circa 25k) and a lump sum.

I also have a couple of small pensions (AVC's) that will allow me to withdraw smallish lump sums (circa 30k)  The first 25% will be tax free and I will be taxed at my rate for the remainder.

My question is this - when I retire my income will reduce and I will drop into the 20% tax bracket.  I want to then draw on my other two smaller pensions - how do I avoid being taxed at 40%?

How does the taxman know that my income has dropped (post retirement) part way through a tax year and not apply 40% accross my pensions and avois the need to claim the tax overpayment back?

Hope that makes sense,

Many thanks,

Neil.

Albermarle

HMRC should be informed by your employer that you have stopped work ( make sure you get a P45)
You can also change your estimated income for the tax year on your on line personal tax account.

Almost inevitably when circumstances change like this . (One income stream stopping and two new ones starting) there will be a couple of months at least before it settles down. However the PAYE system should automatically adjust itself in the remaining part of the tax year, to account for overpayment of tax. 

Dazed_and_C0nfused

keep_it_simple2 said:

Hello All,
Looking for some advice if possible.

I'm currently employed and pay 40% tax.  I am due to retire shortly and claim an occupational pension. (Circa 25k) and a lump sum.

I also have a couple of small pensions (AVC's) that will allow me to withdraw smallish lump sums (circa 30k)  The first 25% will be tax free and I will be taxed at my rate for the remainder.

My question is this - when I retire my income will reduce and I will drop into the 20% tax bracket.  I want to then draw on my other two smaller pensions - how do I avoid being taxed at 40%?

How does the taxman know that my income has dropped (post retirement) part way through a tax year and not apply 40% accross my pensions and avois the need to claim the tax overpayment back?

Hope that makes sense,

Many thanks,

Neil.

HMRC don't deduct tax, the pension provider does.

The normal process ist hat the first payment is taxed using the emergency tax code (1257L).  For smaller amounts this can mean you owe tax to HMRC.  For larger amounts it means you are due a refund from HMRC.

One option to avoid this is to take a very small initial payment, say £10 or £100, and then HMRC will issue a BR (basic rate) tax code and 20% will be deducted from any future payments.

The above assumes you have understood the impacts of income changing part way through a tax year.

Linton

The regular pension income and one-off lump sums are handled differently.....

Firstly consider the ongoing pension.  The first ever payment will be taxed based on the emergency tax code of 1257L which will result in part of the £25K/12 being tax free and the rest charged at basic rate.  HMRC will then know that you have a new income and will allocate separate tax codes to each income stream it believes you are receiving and will inform you.  If you find that they are still allocating a tax code to your employment you can let them know by adjusting your incomes as given in your Tax Account or by contacting them directly.  Any initial errors will sort themselves out during the rest of the tax year or at tax year end if there are no further pension payments in that tax year.

One-off taxable lump sums are different because:
 (a) PAYE effectively assumes that you will be receiving that amount every month for the whole of the tax year which will ensure that a £30K one-off payment is taxed at the highest rate.
(b) There will presumably be no further payments from that source in the tax year to enable initial errors to be resolved.

You have two options to retrieve excess tax.  You can wait until the tax year end when HMRC will repay any excess tax automatically or you can reclaim the excess tax earlier by completing form P55 which can be done online.  See https://www.gov.uk/government/publications/flexibly-accessed-pension-payment-repayment-claim-p55

molerat

The first thing you need to do is work out what the total income from the job and the OP will be for the year.  From there you will see how much you can with draw from the SIPP to keep in the basic band.  After you have taken the small first dip as outlined above a tax code will be allocated.  You can then input the correct amount of taxable income you will be taking from the SIPP and also the job and OP.  Don't try to do it all at once, get the transition from job to OP sorted first.

keep_it_simple2

Many thanks all.  Makes sense to me now.