How to calculate and pay tax on pension withdrawal

Bandy2023

Hi, all
Like many people, we're struggling with the current cost of living and I could really do with taking some money out of my pension.
It's currently crystalised because I took the 25% tax-free sum, but I need more to clear some debts.
I'm used to PAYE though, I've no clue how I'd go about declaring a withdrawal?
Presumably I'd have to register for self assessment and pay it towards the end of this year/start of next?
I'm a 40% earner, so if I withdrew £10K how would I calculate how much to 'hold back' for tax?

NoMore

Your Pension provider will use PAYE as well for the withdrawal, it all depends on your tax code. Its likely your first withdrawal will be overtaxed but then HMRC will issue the correct tax code to the pension and you will be fine after that.

There's no need for SA

MallyGirl

are you going to be a 40% tax payer in retirement? If not then this is a very expensive way to clear debt.

Bandy2023

MallyGirl said:

are you going to be a 40% tax payer in retirement? If not then this is a very expensive way to clear debt.

Haha, no chance!
Needs must in this day and age.

Qyburn

Bandy2023 said:

I'm a 40% earner, so if I withdrew £10K how would I calculate how much to 'hold back' for tax?

It may well get taxed incorrectly when first paid, but ultimately it's going to be taxed at least 40%. More if the £10k pushes you into a higher band.

The point about being a higher rate earner in retirement. If you will be, then this money is going to be taxed at 40% whether you take it now or later. If not then this money would be taxed 20% at worst if taken later. Maybe not taxed at all.

Taking it now you net at most £6k from the £10k withdrawal. Take it later and you get at least £8k and maybe up to all £10k.

It also caps any future pension contributions to no more than £10k per year.

JoeCrystal

What about using small pots rules? I understand the HL can spilt the pots into amount under £10k and this can be used three times? Maybe that is an option with your provider?

Dazed_and_C0nfused

JoeCrystal said:

What about using small pots rules? I understand the HL can spilt the pots into amount under £10k and this can be used three times? Maybe that is an option with your provider?

That would help avoid MPAA but won't change the tax due.

MEM62

@Bandy2023 This is possibly the worst financial decision that you can make.  Firstly, you are taking money from your future self.  Most of us will see a retirement income that is less than we earn when working.  If you are not managing on what you making now how will you manage to live on your pension income - a income that you are eroding even further to cover current spending?  Today's financial challenges need to be met from today's money.  All you are doing by robbing your pension is kicking the can down the road and potentially creating a situation where you will be living out your twilight years in poverty.  Bear in mind that you will also be paying 40% tax on any withdrawal instead of £20 by taking it in retirement.  Any way you look at this it cannot be considered anything other than a very ill advised course of action.      

penners324

You'd then trigger the MPAA limiting future pension contributions to £10k per year.

You'd also pay tax at 42% on the withdrawal.

Sounds an utterly dreadful idea

Dazed_and_C0nfused

MEM62 said:

@Bandy2023 This is possibly the worst financial decision that you can make.  Firstly, you are taking money from your future self.  Most of us will see a retirement income that is less than we earn when working.  If you are not managing on what you making now how will you manage to live on your pension income - a income that you are eroding even further to cover current spending?  Today's financial challenges need to be met from today's money.  All you are doing by robbing your pension is kicking the can down the road and potentially creating a situation where you will be living out your twilight years in poverty.  Bear in mind that you will also be paying 40% tax on any withdrawal instead of £20 by taking it in retirement.  Any way you look at this it cannot be considered anything other than a very ill advised course of action.      

I think that should be 20% 😉

MEM62

Dazed_and_C0nfused said:

MEM62 said:

@Bandy2023 This is possibly the worst financial decision that you can make.  Firstly, you are taking money from your future self.  Most of us will see a retirement income that is less than we earn when working.  If you are not managing on what you making now how will you manage to live on your pension income - a income that you are eroding even further to cover current spending?  Today's financial challenges need to be met from today's money.  All you are doing by robbing your pension is kicking the can down the road and potentially creating a situation where you will be living out your twilight years in poverty.  Bear in mind that you will also be paying 40% tax on any withdrawal instead of £20 by taking it in retirement.  Any way you look at this it cannot be considered anything other than a very ill advised course of action.      

I think that should be 20% 😉

Oh yeah!