Taking avc as a lump sum how does it effect your income tax

butercup

Hi,
 I am planning to cash in my avc to pay off my mortgage. I know I can get the first 25% tax free and would have to pay  40% tax on the rest. My question is would this lump sump be treated as an income if so with my salary it would push me up into the next tax bracket is this correct? I am still working. Thanks in advance

Dazed_and_C0nfused

The 25% TFLS is just that, tax free (assuming you don't hit the overriding limit of ~£273k tax free cash).

The taxable part is just like earnings and will be taxed accordingly.  The wrong tax might be taken at first but it will all come out in the wash idc.  With you owing more or due a refund.

DE_612183

what is your current salary?

you could ( if you're able to wait ) spread it over two financial years which may lessen the impact.

Marcon

butercup said:

Hi,
 I am planning to cash in my avc to pay off my mortgage. I know I can get the first 25% tax free and would have to pay  40% tax on the rest. My question is would this lump sump be treated as an income if so with my salary it would push me up into the next tax bracket is this correct? I am still working. Thanks in advance

The taxable 75% of the lump sum will be added to your other taxable income for the year and tax would be levied at your marginal rate - meaning whatever rate will apply once the 75% has been added. So yes, you do need to look at the consequences of cashing it in. Given that it's an AVC, you may have to take the lot in one go - check with your scheme.

Dazed_and_C0nfused

Dazed_and_C0nfused said:

The 25% TFLS is just that, tax free (assuming you don't hit the overriding limit of ~£273k tax free cash).

The taxable part is just like earnings and will be taxed accordingly.  The wrong tax might be taken at first but it will all come out in the wash idc.  With you owing more or due a refund.

That should have said ~£268k, not £273k.

dunstonh

 I am planning to cash in my avc to pay off my mortgage. 

That is normally a bad idea for most people.   Why do you think that it is a good reason for you?

My question is would this lump sump be treated as an income if so with my salary it would push me up into the next tax bracket is this correct? 

Correct.    You would also have to notify your workplace pension that you have accessed the pension flexibly and it will reduce your annual allowance to just £10k (including employer contributions).

You may also be robbing your retirement years and removing potential tax-efficient options on the main scheme it is linked to.