Private Pension Tax

helpmeretire_57

My husband is a non tax payer as his pension is under the £12500 tax threshold. He is 62 yrs old so has not qualified for his State Pension. 

My husband withdrew his full tax free 25% from a further personal pension plan he has in 2023. He plans to take a further lump sum in this tax year - Approx £7k.  

We understand that the pension provider automatically takes 40% tax and  my husband can contact HMRC to request a 20% tax refund or wait until the following tax year to be automatically reimbursed.  Having just read an article on this site called How the starting rate for savings works/How to get tax-free interest if you earn under £18570
Will my husband  have to pay tax on the £7k he is taking out of his pension pot?  We think he does but confused by the article.
Thank you  in advance and apologies if the answer is obvious.

molerat

Savings interest and pensions are completely different.  If he has not got a tax code allocated to his pension the provider will allocate 1257LM1 to the first withdrawal meaning the first £1048 is tax free with the next £3142 taxed at 20% and the remainder at 40%.  Any overpaid tax can be reclaimed or left for HMRC to deal with after the end of the year.  If the pension allows flexible access he could take under £1048 which will incur no tax deduction and wait for HMRC to issue a code.  He can then make further withdrawals according to that code.  Is he already receiving a pension income using part of his allowance ?

Organgrinder

Even if he has already taken his lump sum he can take money out of his pension tax free provided he does not go over his personal allowance. However, tax may be paid initially depending on whether the provider has been issued with a tax code.

Any withdrawal is taxed as income. So if for example his pension is £10,000 he can take £2570 out tax free. Your provider should have a tax code for your pension if you've accessed it previously.

However, it is of course not that simple. If there is no tax code then if you take £7000 out then HMRC will assume you're setting up a regular income of 12x7000 and you will get tax as if you were earning £84,000 pa. This may be where you've got the 40% figure from.

Either way, any overpaid tax can be reclaimed.

Albermarle

 Having just read an article on this site called How the starting rate for savings works/How to get tax-free interest if you earn under £18570

This only applies to interest from savings accounts.

If you have no taxable income at all, you can earn up to £18,570 in interest without paying tax.

If you have say £10K in taxable income, then you can earn £8,570 in interest without paying tax.

After you reach £17, 570 in taxable income , or more, you can earn only £1000 in interest tax free ( less if you have a highish income, over £50K)