Tax code regarding two pensions

gunnyhighway

Hello to everyone, first time post from me.

I have been receiving my Local Government pension for around 3 years now after taking early retirement at age 60, I'm 63 now. I receive from this around £5000 per year, this is my only income aside from interest from savings which is less than the limits that I am allowed (£5000 starter rate+£1000 personal savings allowance, total £6000)

Last year I put  another previous employment pension into drawn down and took the 25% lump sum,around £11000 for house improvements and left the rest in the pension to be accessed later.I now want to access the money left in the pension which is around £33000 but want to stay below the £12570 personal allowance before tax kicks in so looking at taking £7500 before this coming April 2025 I am planning to do this every year until the money in that pension is used up.

I know I will be taxed on the £7500 @20% meaning £1500 in tax leaving me £6000 but I will get this back as I will be under my personal allowance of £12570, £5000 pension+£7500 draw down =£12500. My question is when I get the draw down money will I get another tax code for this pension? 

Also as it will be a £7500 payment in one go in one month, probably March 2025, will HMRC class this as a monthly, not yearly income?

My fear is that HMRC will adjust the tax code on my LG pension to tax me on a yearly income of £95000, (£7500x12=90000+ £5000 LG pension) and wipe out my monthly LG pension completely!!

I would greatly appreciate any advice or help on this, many thanks to all.

eskbanker

You'll get one tax code per pension, according to the projected income for each, so a new stream won't affect the code for the other one.  Once the second one has started, you can update the projected income for 2025/26 via your online personal tax account, to ensure that taxation is as accurate as it can be....

dunstonh

Also as it will be a £7500 payment in one go in one month, probably March 2025, will HMRC class this as a monthly, not yearly income?

If you do it in month 11 in March it will be taxed on the expectation of earning £15,000 in the tax year.  If you do it in month 12 in march it will be taxed on it being £7500 as its the final month in the payroll.  (payroll month doesn't match calender month)

Albermarle

dunstonh said:

Also as it will be a £7500 payment in one go in one month, probably March 2025, will HMRC class this as a monthly, not yearly income?

If you do it in month 11 in March it will be taxed on the expectation of earning £15,000 in the tax year.  If you do it in month 12 in march it will be taxed on it being £7500 as its the final month in the payroll.  (payroll month doesn't match calender month)

But be aware that pension providers may take some time to process the payment.

boingy

I'm trying to do a similar thing for this tax year and probably the next one. The LGPS pays what it pays and I've set the other pension to pay an amount that should bring me in just below the personal allowance, allowing a little headroom for mismatched dates and stuff (I've never been quite sure how they treat that little bit of April at the end of each Tax year!).

Initially the second pension was taxed at the "emergency" rate until I went to the HMRC portal and put the exact numbers in. They quickly issued two new tax codes, which looked good for a couple of months but then those codes changed again, for no apparent reason so I'm paying tax when I shouldn't be. I've just put the numbers into the portal again. It's not like it's complicated but it looks like I'll be reclaiming a couple of hundred quid in tax for this year when the dust settles.

jaypers

It’s very easy and it all works out. Make sure you are signed up with a government gateway ID and when logged in update the estimated annual income against all of your income streams. This then takes 48 hours to update and the overall tax being taken should be correct (there or there abouts). It’s not always how you expect it to look but it does balance out correctly. 

gunnyhighway

Many thanks to everyone who replied, its much clearer to me now what to expect.

Re the point about which date in March 2025 I should try and take the draw down money I called the pension company and they can't give me a specific date or time frame when it will be transferred so I'll aim to request it on 1st of March and hopefully it'll get to me after the 6th March and before the 5th April.

Thanks again to everyone for replying its much appreciated and if I encounter any issues with HMRC I'll report back.

GH

Dazed_and_C0nfused

gunnyhighway said:

Hello to everyone, first time post from me.

I have been receiving my Local Government pension for around 3 years now after taking early retirement at age 60, I'm 63 now. I receive from this around £5000 per year, this is my only income aside from interest from savings which is less than the limits that I am allowed (£5000 starter rate+£1000 personal savings allowance, total £6000)

Last year I put  another previous employment pension into drawn down and took the 25% lump sum,around £11000 for house improvements and left the rest in the pension to be accessed later.I now want to access the money left in the pension which is around £33000 but want to stay below the £12570 personal allowance before tax kicks in so looking at taking £7500 before this coming April 2025 I am planning to do this every year until the money in that pension is used up.

I know I will be taxed on the £7500 @20% meaning £1500 in tax leaving me £6000 but I will get this back as I will be under my personal allowance of £12570, £5000 pension+£7500 draw down =£12500. My question is when I get the draw down money will I get another tax code for this pension? 

Also as it will be a £7500 payment in one go in one month, probably March 2025, will HMRC class this as a monthly, not yearly income?

My fear is that HMRC will adjust the tax code on my LG pension to tax me on a yearly income of £95000, (£7500x12=90000+ £5000 LG pension) and wipe out my monthly LG pension completely!!

I would greatly appreciate any advice or help on this, many thanks to all.

That is completely wrong.  The pension provider should use the emergency tax code (1257L) on the first payment, meaning more than 20% will be deducted.  It will be a mix of no tax, 20% and 40%, probably ~£2k.

If you want to minimise the tax deducted at source you can always take a small first taxable payment (no more than £1,048) and then as soon as you see HMRC have this information from the pension company (you will see it is a new pension in your Personal Tax Account) you can provide updates to your expected income from each pension for 2024-25 i.e. £5,000 and £7,500, and this will prompt a new tax code calculation.

As your existing pension won't be using up all your tax code allowances some will be allocated to the new pension.  Using the figures you have provided the new tax codes would be 500L* for your existing pension and 750T for your new one.

HMRC will calculate new codes anyway when they get the first payment from the new pension but their estimate of what you get from each pension won't be as accurate as the figures you can provide as no one knows what you expect to get as well as you yourself.

*500L rather than 507L as your remaining unused tax code allowances will be used by some of your untaxed interest.

The above assumes you haven't applied for Marriage Allowance.

gunnyhighway

Hi,I forgot about the emergency code bit so thanks for your input. I'm not overly worried about minimising the initial tax grab as I'll be claiming that all back as soon as I can as I'll be under my personal allowance, it was more about what would happen to my existing pension payments when I access my second pension stream but I'm happy now about what will/should(!) happen thanks to the answers from the knowledgeable members on here.

Thanks again to all

Qyburn

gunnyhighway said:

My fear is that HMRC will adjust the tax code on my LG pension to tax me on a yearly income of £95000, (£7500x12=90000+ £5000 LG pension) and wipe out my monthly LG pension completely!!

Our experience was that they didn't. Lady Q has two small DB pensions, and took a lump sum from her SIPP last year. The SIPP provider taxed the lump sum on a month 1 basis but HMRC didn't change the codes for the DB pension. 

What they did the following year is issue a code to the SIPP provider assuming she'd take the same amount this year, and splitting the personal allowance.  Those figures can be tweaked in the online account.