Tax on private pension - can anybody confirm if this is correct.

Longstrider

I get a monthly amount from my private pension and then draw a lump sum which is charged at the emergency tax rate. The excess tax I thought I would reclaim using a P55, but the tax office advised that my pension admin will adjust. For two months now the pension have given me extra monies with no explanation. They have since advised this is the rebate. Two issues 1. I am still 7k short and why is it being drip fed back when it’s take in one lump. Seems to me I am losing out due to the emergency tax being drip fed back to me, when if it was returned as a lump sum I could put it in savings and get 5% interest.

Hoenir

That's the way the tax system works. 

Dazed_and_C0nfused

Longstrider said:

I get a monthly amount from my private pension and then draw a lump sum which is charged at the emergency tax rate. The excess tax I thought I would reclaim using a P55, but the tax office advised that my pension admin will adjust. For two months now the pension have given me extra monies with no explanation. They have since advised this is the rebate. Two issues 1. I am still 7k short and why is it being drip fed back when it’s take in one lump. Seems to me I am losing out due to the emergency tax being drip fed back to me, when if it was returned as a lump sum I could put it in savings and get 5% interest.

Do you mean you have a single pension which you take variable amounts from.

Or you have two separate pensions?

Its how the pension company/companies report things to HMRC that is key.

If you have one pension which you chose to take an extra amount from then,
a).  It's unlikely emergency tax was deducted
b).  P55 won't be relevant

Tax is all about the details and you haven't really given enough to be certain what is happening.

Marcon

Longstrider said:

I get a monthly amount from my private pension and then draw a lump sum which is charged at the emergency tax rate. The excess tax I thought I would reclaim using a P55, but the tax office advised that my pension admin will adjust. For two months now the pension have given me extra monies with no explanation. They have since advised this is the rebate. Two issues 1. I am still 7k short and why is it being drip fed back when it’s take in one lump. Seems to me I am losing out due to the emergency tax being drip fed back to me, when if it was returned as a lump sum I could put it in savings and get 5% interest.

If you can give the (gross) figures for your monthly payments and the lump sum payment (and whether any part of that was tax free), it'll be easier to answer accurately and helpfully.

dunstonh

Longstrider said:

I get a monthly amount from my private pension and then draw a lump sum which is charged at the emergency tax rate. The excess tax I thought I would reclaim using a P55, but the tax office advised that my pension admin will adjust. For two months now the pension have given me extra monies with no explanation. They have since advised this is the rebate. Two issues 1. I am still 7k short and why is it being drip fed back when it’s take in one lump. Seems to me I am losing out due to the emergency tax being drip fed back to me, when if it was returned as a lump sum I could put it in savings and get 5% interest.

You have just described PAYE for as long as anyone can remember.  i.e. emergency tax in month one and then refunds over the remainder of the tax year to balance in March.

If you want to talk about earning interest on it, then it suggests that the money wasn't needed in the way you took it.  perhaps you should have taken less up front and taken it when it was needed.  Then you could have earned tax free in the pension instead.

Longstrider

One pension which I have a monthly amount. Then when needed a lump sum. This is then taxed as emergency tax which I have to reclaim, thus is drip fed back to me. Yup this appears to be HMRC process. So I will change the way I take money from my pension. The lump sum is needed, what I was not happy with is being charged emergency tax on it. It’s the emergency tax element that I would prefer back in one payment rather than drip fed so I could put the repaid excess tax in a savings account and use when needed. 

Hoenir

Longstrider said:

 Yup this appears to be HMRC process.

Exactly the same way all payroll processing works (and has worked for a very long time). Any form of one large one off lump sum taxable payment such as a bonus or redundancy pay is treated this way. All unwinds in the end and any excess tax is either refunded or progressivly repaid. . 

molerat

Longstrider said:

One pension which I have a monthly amount. Then when needed a lump sum. This is then taxed as emergency tax which I have to reclaim, thus is drip fed back to me. Yup this appears to be HMRC process. So I will change the way I take money from my pension. The lump sum is needed, what I was not happy with is being charged emergency tax on it. It’s the emergency tax element that I would prefer back in one payment rather than drip fed so I could put the repaid excess tax in a savings account and use when needed. 

It is not being taxed as "emergency tax", it is being taxed in accordance with normal monthly PAYE.  Emergency tax is a completely different scenario when a normal PAYE code is not in use.  Understanding how the PAYE system works makes it relatively easy to tailor your draw downs to minimise the tax paid up front.

hugheskevi

PAYE works by giving you 1/12 of your Personal Allowance each month, and the thresholds for basic rate and higher rate income tax are similarly pro-rata'd.

Whether you take regular income or one-off lump sums doesn't matter, whatever taxable income you have taken year-to-date is assessed against the pro-rata'd allowances and thresholds each month.

So when you take a lump sum early in the financial year you pay higher rate tax on it as the total taxable income taken from the pension exceeds the pro-rata'd allowances and thresholds. Then in subsequent months as more pro-rata'd thresholds and allowances become available you fall back below the pro-rata higher rate threshold and so have paid the correct amount of tax - this is what you perceive as a refund being drip-fed back to you, but there is no refund being made, just the appropriate amount of income tax being deducted each month under PAYE.

There is no emergency and there are no HMRC assumptions being made, it is just the PAYE system working as intended to ensure that most people pay about the right amount of tax throughout the year and by year-end, with any remaining differences being sorted out through self-assessment or separate charges/refunds.

Longstrider

Ok well having had a long conversation with HMRC yesterday. I have the information I need and how to better tax plan with my private pension. None of which are above. But thanks for offering info

Phoenix72

Longstrider said:

Ok well having had a long conversation with HMRC yesterday. I have the information I need and how to better tax plan with my private pension. None of which are above. But thanks for offering info

I suspect any info you get here will be more accurate than a front line advisor at HMRC will give you.