Tax on yearly drawdown

warrenb

I am trying to work out how much tax I would have to pay if I start drawdown at the beginning of a new tax year. So the scenario is to drawdown £30k in a tax year.

Do I assume that 25% (as I am not taking the 25% lump sum) of this is tax free so the calculation is

30000-(12750+25% of 30k)
So this would be 30000-(12750+7500)

Which means tax would be paid on the remainder, this being 9750, so over the year I would have to pay 1950 in tax, or am I barking up the completely wrong tree.

Mutton_Geoff

Assuming no other taxable income, the standard personal allowance is £12,570 (not £12,750 as you suggest). With 25% tax free from £30k, that leaves £22,500 to be taxed, less personal allowance of £12,570 equals £9,930 taxed at basic rate, ie £1,986 tax. Leaves £28,014 in your pocket. Be aware that first drawdown is usually taxed on a month 1 basis so you may need to claim back surplus tax paid in your first month.

warrenb

Yes, I don't know why but I always write 12750 when I mean 12570, so apart from that my assumption is basically correct, this is good, as it means not taking the 25% tax free lump sum gives people a little extra to play with on a yearly basis.

Many thanks for confirming this

I wonder how many people if not taking the 25% lump sum miss this in their calculations.

ader42

£30k minus the £7.5K TFLS leaves £22,750 minus £12,570 (zero rate income tax taxable / personal allowance) leaves £10,180 taxed at 20%
So Income Tax of £2,036.

Dazed_and_C0nfused

ader42 said:

£30k minus the £7.5K TFLS leaves £22,750 minus £12,570 (zero rate income tax taxable / personal allowance) leaves £10,180 taxed at 20%
So Income Tax of £2,036.

Figure should be £22,500.

Tax is only £1,986.

Assuming not Scottish resident and Marriage Allowance isn't in play.

warrenb

So to summarise

No 25% TFLS taken

30000-(12570+7500) = 9930

(9930/100)*20 = 1986 tax.



With 25% TFLS taken on total pension.

30000-12570 = 17430

(17430/100)*20 = 3486 tax.

Dazed_and_C0nfused

warrenb said:

So to summarise

No 25% TFLS taken

30000-(12570+7500) = 9930

(9930/100)*20 = 1986 tax.



With 25% TFLS taken on total pension.

30000-12570 = 17430

(17430/100)*20 = 3486 tax.

Yes but you might find life simpler by separating tax exempt income from taxable income.

In the first scenario the £7,500 can just be totally ignored.

Albermarle

warrenb said:

I am trying to work out how much tax I would have to pay if I start drawdown at the beginning of a new tax year. So the scenario is to drawdown £30k in a tax year.

Do I assume that 25% (as I am not taking the 25% lump sum) of this is tax free so the calculation is

30000-(12750+25% of 30k)
So this would be 30000-(12750+7500)

Which means tax would be paid on the remainder, this being 9750, so over the year I would have to pay 1950 in tax, or am I barking up the completely wrong tree.

Are you aware that there are various scenarios for withdrawal. For example;
1) Take all the 25% tax free at once and then take taxable income only later.
2) Take the 25% tax free in stages and then take taxable income only later
3) Take a mixture of tax free and taxable income.

Older pensions may not offer all options and in any case you will need to discuss with the pension provider in advance what you wish/intend to do.