Tax on pension drawdown

MouldyOldDough

My wife is considering taking more than 25% from her pension pot at in 2 months time (she will be 55) - she has £90k in her pension investment.

We are aware that she can only withdraw 25% tax free - but her income is limited to carers allowance (£4k pa) - so presumably - she can take another £8500 tax free  ?

Meaning a total of £31,000 tax free ?

NannaH

Better to take the tax free lump sum, then take a small amount from the drawdown account in order to get a tax code,  then take the rest , has she got a personal tax account/ government gateway, if so she can update her account to say what income she expects to take this year. 

If she takes the other £8500 in one go, she will be taxed as if that will me her monthly income and pay 40% tax on some of it,  then go through the rigmarole of claiming it back. 

molerat

Is there a reason why she wants to take the tax amount free all at once ?

MouldyOldDough

molerat said:

Is there a reason why she wants to take the tax amount free all at once ?

Yes there is 
Home improvements 

MouldyOldDough

NannaH said:

Better to take the tax free lump sum, then take a small amount from the drawdown account in order to get a tax code,  then take the rest , has she got a personal tax account/ government gateway, if so she can update her account to say what income she expects to take this year. 

If she takes the other £8500 in one go, she will be taxed as if that will me her monthly income and pay 40% tax on some of it,  then go through the rigmarole of claiming it back. 

Really?
So HMRC will believe that her monthly income will be £8500?
Is there no way to tell them prior to the drawdown exactly what she is doing? 

Doctor_Who

MouldyOldDough said:

NannaH said:

Better to take the tax free lump sum, then take a small amount from the drawdown account in order to get a tax code,  then take the rest , has she got a personal tax account/ government gateway, if so she can update her account to say what income she expects to take this year. 

If she takes the other £8500 in one go, she will be taxed as if that will me her monthly income and pay 40% tax on some of it,  then go through the rigmarole of claiming it back. 

Really?
So HMRC will believe that her monthly income will be £8500?
Is there no way to tell them prior to the drawdown exactly what she is doing? 

Yes, it's a common problem. An up to date P45 sent to HMRC can mitigate the issue, but it doesn't appear that your wife will have one. Taking a small amount of taxable income will trigger HMRC to issue the pension provider with a tax code. More info below:

https://techzone.abrdn.com/public/pensions/emergency-tax-and-pensions-guide

QrizB

MouldyOldDough said:

Is there no way to tell them prior to the drawdown exactly what she is doing? 

The usual advice is to split the taxable money over two or more months. Take a smaller sum in the first month to prompt HMRC to issue a tax code to the pension firm, then take a larger amount the next month.

Edit to add: exactly as NannaH said!

Dazed_and_C0nfused

MouldyOldDough said:

NannaH said:

Better to take the tax free lump sum, then take a small amount from the drawdown account in order to get a tax code,  then take the rest , has she got a personal tax account/ government gateway, if so she can update her account to say what income she expects to take this year. 

If she takes the other £8500 in one go, she will be taxed as if that will me her monthly income and pay 40% tax on some of it,  then go through the rigmarole of claiming it back. 

Really?
So HMRC will believe that her monthly income will be £8500?
Is there no way to tell them prior to the drawdown exactly what she is doing? 

She can tell them what she wants but it's the pension provider who operates PAYE and deducts any tax.andcthey will use the emergency tax code (1257L) on the first payment (on a non cumulative basis).

NannaH

If it was the end of the tax year she could get away with it but the Pension people will give her a tax code on the 1st taxable withdrawal and tax accordingly.  

Depending on when she actually gets the non tax free payment it might only be taxed at 20%.
As I said, if she takes around £1000 as her first drawdown,  she will get a tax code and pay no tax,  as the assumed income is under her PA,  then she can take a bigger payment and   I think that the pension people won’t tax her further unless she goes over her personal allowance but I’m not 100%.  Best to check with the provider. 

I took drawdown last year from June and kept to £1040 for a few months, when I took £1250 one month, it wasn’t taxed. 

molerat

Take a small dip to get a tax code then take more later.  Tax will be calculated in the same way as if employed with the tax free amount being x/12ths of the tax allowance year to date.  Once the code is allocated the only way to get the whole of your tax allowance applied to a larger lump sum so no tax deducted is by taking the second dip in March.

dunstonh

MouldyOldDough said:

NannaH said:

Better to take the tax free lump sum, then take a small amount from the drawdown account in order to get a tax code,  then take the rest , has she got a personal tax account/ government gateway, if so she can update her account to say what income she expects to take this year. 

If she takes the other £8500 in one go, she will be taxed as if that will me her monthly income and pay 40% tax on some of it,  then go through the rigmarole of claiming it back. 

Really?
So HMRC will believe that her monthly income will be £8500?
Is there no way to tell them prior to the drawdown exactly what she is doing? 

Yes.  You complete the appropriate P5x form online and get a refund back about 3 weeks later.  Paper version may take 8-12 weeks.