Tax on tax free lump sum

venster

My wife who earns around £20kpa is thinking of taking out her lump sum from her pension circa £50k. We understand the actual lump is tax free but will be added to her personal annual income which will take her into the 40% tax bracket. 

How would this extra tax be taken? Would her tax code change for the rest of the FY and then revert back to original- in other words just pay 40% on her wages until the next FY.

 I’ve tried googling but can’t find anything to explain what happens practically. 

And is there anyway around it?

Thanks. 

Dazed_and_C0nfused

venster said:

My wife who earns around £20kpa is thinking of taking out her lump sum from her pension circa £50k. We understand the actual lump is tax free but will be added to her personal annual income which will take her into the 40% tax bracket. 

How would this extra tax be taken? Would her tax code change for the rest of the FY and then revert back to original- in other words just pay 40% on her wages until the next FY.

 I’ve tried googling but can’t find anything to explain what happens practically. 

And is there anyway around it?

Thanks. 

Where have you got that understanding from.

Some tax related things are very badly named but the TFLS isn't one of them.

QrizB

The tax free lump sum is tax free.

Any additional withdrawal is taxable at the relevant marginal rate.

Albermarle

In practical terms the tax free lump sum is invisible to HMRC and there is no need to ever declare it on any tax return.

You or your partner may benefit from a free chat with PensionWise 

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molerat

The tax free lump sum is, as it says on the tin, tax free.  No tax will be deducted or will be due.

Any taxable amount will be taxed at source by the pension provider, using an emergency tax code, and will be added to any other income to work out the actual tax liability.

venster

Thanks everyone for your replies. 

A friend has taken some of his lump from a DB pension and is now paying extra through his code because his annual income, because of the TFLS, took him into the next personal tax threshold. 

So the annual scheme pension that we’d also get is the part that is counted towards the personal tax and then that could push you into a new tax bracket ( which it won’t) ?

Doctor_Who

venster said:

Thanks everyone for your replies. 

A friend has taken some of his lump from a DB pension and is now paying extra through his code because his annual income, because of the TFLS, took him into the next personal tax threshold. 

So the annual scheme pension that we’d also get is the part that is counted towards the personal tax and then that could push you into a new tax bracket ( which it won’t) ?

A DB pension TFLS typically comes with an associated taxable pension. It will be the taxable pension that your friend is paying tax on and nothing to do with the TFLS.

squirrelpie

venster said:

will be added to her personal annual income which will take her into the 40% tax bracket.

It isn't your personal annual income that determines your tax bracket. It is your taxable income. And a tax fee lump sum isn't part of your taxable income.

venster

Thanks everyone. Makes sense now. Really appreciate everyone’s help 👍

Dazed_and_C0nfused

venster said:

Thanks everyone for your replies. 

A friend has taken some of his lump from a DB pension and is now paying extra through his code because his annual income, because of the TFLS, took him into the next personal tax threshold. 

So the annual scheme pension that we’d also get is the part that is counted towards the personal tax and then that could push you into a new tax bracket ( which it won’t) ?

Your friend is wrong.

Or if not they are the first person I've ever heard of where TFLS is being factored in by HMRC.

The pension itself is taxable income just like taxable earnings, business profits, non ISA interest etc.

mebu60

Doctor_Who said:

venster said:

Thanks everyone for your replies. 

A friend has taken some of his lump from a DB pension and is now paying extra through his code because his annual income, because of the TFLS, took him into the next personal tax threshold. 

So the annual scheme pension that we’d also get is the part that is counted towards the personal tax and then that could push you into a new tax bracket ( which it won’t) ?

A DB pension TFLS typically comes with an associated taxable pension. It will be the taxable pension that your friend is paying tax on and nothing to do with the TFLS.

And if your friend has taken the taxable part of their pension as a single payment their tax code will initially be treated as if they will receive 12 x this payment per annum. That could push someone temporarily into the next tax bracket until resolved. It certainly is not the TFLS as others have already said.