0% tax payer pays no tax on accrued state pension

blueschorus72

I cannot find a financial advisor who agrees with the discussion title.... however, from what I've read, a pensioner who has accrued their pension and claims it when they retire from work (and their state only pension is below the personal allowance) is 0% tax therefore their accrued pension lump sum is tax free.  

I did this - almost successfully - but stupidly thought half way through the 0%tax year I would put my lump sum into a fixed term saving - I got £1,900 interest in the year which has put me approx £700 over my personal allowance and this is costing me £17k in tax!!!

Advice is do not put your lump sum into savings unless tax free isa's - as you too will end up paying tax of 20% on your lump sum.

Can anyone advise me that as the interest has put my personal allowance up £700 - am I entitled to earn any interest tax free?

Hoenir

"I cannot find a financial advisor who agrees with the discussion title."

 That's no great surprise. 

The state pension is not tax free. Deferring the state pension does not absolve one of a tax liability. No such thing thing as a 0% taxpayer per se. Those who don't pay tax are those with a taxable income which doesn't exceed their annual personal tax allowance, 

molerat

https://www.litrg.org.uk/pensions/state-pension/tax-state-pension/tax-deferred-state-pension-lump-sums#2

When thinking about the tax rate payable on a lump sum, you must ignore the 0% rates which are used to tax savings and dividend income – that is the starting rate for savings, the savings nil rate (or personal savings allowance) and the dividend nil rate (or dividend allowance).

In other words, the question is what is the highest rate of tax which would apply if income falling in these 0% rates were taxed at the normal rates. This can make a significant difference to the tax payable on the lump sum.

For example, if your total taxable income falls within the basic rate band (even if some of that income is taxed at 0% due to it being taxed at the savings and dividend rates), you will pay tax at 20% on your state pension lump sum.

The interest made you a "basic rate tax payer" although the interest was taxed at 0%.

squirrelpie

I agree with Hoenir. But I can't fully understand the OP's post. Is it talking about just the state pension or is another pension involved. I can't see how £1900 interest would cause a £17k tax bill.

eskbanker

blueschorus72 said:

I cannot find a financial advisor who agrees with the discussion title.... however, from what I've read, a pensioner who has accrued their pension and claims it when they retire from work (and their state only pension is below the personal allowance) is 0% tax therefore their accrued pension lump sum is tax free.  

I did this - almost successfully - but stupidly thought half way through the 0%tax year I would put my lump sum into a fixed term saving - I got £1,900 interest in the year which has put me approx £700 over my personal allowance and this is costing me £17k in tax!!!

Advice is do not put your lump sum into savings unless tax free isa's - as you too will end up paying tax of 20% on your lump sum.

Can anyone advise me that as the interest has put my personal allowance up £700 - am I entitled to earn any interest tax free?

The figures you've quoted can't be right, so please clarify your actual income streams for the year, and how much tax you've paid (or been asked to pay).  Explanation below (and above!) not taken into account....

molerat

The link in my post above is likely the situation. Their only income in the year was below the allowance so an old sp lump sum would be taxed at their highest rate which is 0%. But the interest took them above the allowance and although it was taxed at 0% it made them effectively a 20% tax payer so the whole lump sum was taxed at that rate. One of the quirks of the system.

HappyHarry

If the OP was due their state pension before 2016 and deferred it until last year, then they could have opted to receive a state pension lump sum.

This is taxed very differently to normal income. The tax rate applied to a state pension lump sum is the highest income tax rate that the individual pays that year - not counting the state pension lump sum.

e.g. if an individual paid tax at 20% then the pension lump sum would be taxed at 20%. This would even be the case if the individual had an income of £50,000 in the tax year and a state pension lump sum of £80,000.

If the total income of an individual was below their personal allowance, then the state pension lump sum would be taxed at 0%, regardless of its size. The personal allowance is not increased by use of the personal savings allowance.

If the OP received interest of £1,900 in the tax year, and that pushed their total income for that year above their personal allowance, then the whole of the state pension lump lump sum would have been taxable at 20%.

Unfortunately it seems that receiving £1,900 in interest has been a costly error for the OP.

blueschorus72

Thanks for all comments - most useful and yes this is exactly it - the £1,900 interest on my lump sum has cost me over £17k!!! Seems we are penalised for trying to stretch out a lump sum - the £17k is over 2 yrs accrued pension!

Unless there is some other allowance I am not aware of of eg the interest was paid monthly rather than annually or some tax relief I don't know about eg some 20% tax payers are entitled to £1k savings?

molerat

blueschorus72 said:

Thanks for all comments - most useful and yes this is exactly it - the £1,900 interest on my lump sum has cost me over £17k!!! Seems we are penalised for trying to stretch out a lump sum - the £17k is over 2 yrs accrued pension!

Unless there is some other allowance I am not aware of of eg the interest was paid monthly rather than annually or some tax relief I don't know about eg some 20% tax payers are entitled to £1k savings?

The £1K interest is on top of your tax allowance and the £5K starter rate.  But if that £1K took you above your personal allowance you would still be in the same situation.  If your earned income was £12569 and you received £2 interest you would still have paid that tax.

blueschorus72

Bummer! but thanks

Dazed_and_C0nfused

@blueschorus72 I suspect it probably won't be of any help but just on the off chance you might want to read the Applicable Year of Assessment section here.

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim75750