Pension lump sum. What rate is it taxed at?

potnoodle68

Hi all,

I currently receive a monthly salary pension after retiring and I also now work . My combined income from salary and monthly pension is just under the higher personal allowance tax threshold,  so pay 20% tax on my income.

I have another penson pot I am thinking of taking as a whole lump sum. with no monthly payments.  I expect 25% of it to be tax free and the remaining amount to be taxed.  The answer I can't seem to find anywhere is... will the rest of the taxable lump sum take me over the higher tax threshold of my personal allowance?  Will this lump sum be taxed at the 40% or does this not apply as it's not an annual income as such and may be taxed at the 20% rate?

Thanks 

Dazed_and_C0nfused

potnoodle68 said:

Hi all,

I currently receive a monthly salary pension after retiring and I also now work . My combined income from salary and monthly pension is just under the higher personal allowance tax threshold,  so pay 20% tax on my income.

I have another penson pot I am thinking of taking as a whole lump sum. with no monthly payments.  I expect 25% of it to be tax free and the remaining amount to be taxed.  The answer I can't seem to find anywhere is... will the rest of the taxable lump sum take me over the higher tax threshold of my personal allowance?  Will this lump sum be taxed at the 40% or does this not apply as it's not an annual income as such and may be taxed at the 20% rate?

Thanks 

When you take it the taxable element will probably have a mix of 0, 20, 40 and possibly 45% tax deducted.

The actual tax ultimately due will depend on how much basic rate band you have available.

Say that is £1,500 and you take £20,000 in taxable pension then you will pay 20% on £1,500 and 40% on the remaining £18,500.

Moots2024

I have just been reading this. I found it really useful... May help you.

https://www.moneysavingexpert.com/reclaim/overpaid-pension-tax/

Marcon

potnoodle68 said:

Hi all,

I currently receive a monthly salary pension after retiring and I also now work . My combined income from salary and monthly pension is just under the higher personal allowance tax threshold,  so pay 20% tax on my income.

I have another penson pot I am thinking of taking as a whole lump sum. with no monthly payments.  I expect 25% of it to be tax free and the remaining amount to be taxed.  The answer I can't seem to find anywhere is... will the rest of the taxable lump sum take me over the higher tax threshold of my personal allowance?  Will this lump sum be taxed at the 40% or does this not apply as it's not an annual income as such and may be taxed at the 20% rate?

Thanks 

In simple terms, just add the taxable 75% of the lump sum to the rest of your taxable income for the year, take off the personal allowance, and the rest is taxable at whatever rate applies: https://www.gov.uk/income-tax-rates and scroll to 'Income Tax Rates and Bands'.

prowla

If the pension is under £10k it is possible that it may be waved through at 20%.

I don't recall what the precise term is.

Marcon

prowla said:

If the pension is under £10k it is possible that it may be waved through at 20%.

I don't recall what the precise term is.

I wonder if you're confusing this with the 'small pots' regime - the £10K suggests that's possible. 

There is no 'waving through', though - the taxable part of a pension pot is added to the rest of an individual's taxable income for the tax year in which it is received.

prowla

Marcon said:

prowla said:

If the pension is under £10k it is possible that it may be waved through at 20%.

I don't recall what the precise term is.

I wonder if you're confusing this with the 'small pots' regime - the £10K suggests that's possible. 

There is no 'waving through', though - the taxable part of a pension pot is added to the rest of an individual's taxable income for the tax year in which it is received.

Not confusing - that's it.

My pension provider said one thing, but the IR website says other.

ManMadeWays

Time the withdrawal(s) to avoid earnings/pensions income taking out more the £50,270 in one tax year if possible.

25% will be tax free, the 75% will be taxed at 20% for the amount still under £50,270 and 40% on the amount over.

ie if your combined gross income is £47,270 you can take another £3,000 @ 20% , anything more is at 40%.

Possibly go part time for a year or two if you value free time ? May also save NI

any salary sacrifice arrangments for more holiday ?

Linton

prowla said:

Marcon said:

prowla said:

If the pension is under £10k it is possible that it may be waved through at 20%.

I don't recall what the precise term is.

I wonder if you're confusing this with the 'small pots' regime - the £10K suggests that's possible. 

There is no 'waving through', though - the taxable part of a pension pot is added to the rest of an individual's taxable income for the tax year in which it is received.

Not confusing - that's it.

My pension provider said one thing, but the IR website says other.

The confusion could be that the tax that is due to be paid is likely to be less than the tax that is actually deducted. This arises from the way that PAYE works being really designed to deal with ongoing income rather than one-off payments. It is sorted out by HMRC at the end of the tax year if not earlier.