Taxation of one off drawdown pension withdrawal

Badknee

Hi.

I would be grateful for any advice about potential tax implications regarding one off drawdown pension withdrawals. 

By way of background I have already taken my tax-free lump sum and have subsequently been making monthly withdrawals from my drawdown pension for just under 12 months now. I have been under the tax threshold throughout as my monthly withdrawals have been £1,047.50 a month. Accordingly I've not paid any tax to date and so far during the current tax year I've withdrawn a total of £4,190.00. I am taxed on a cumulative basis, albeit I've not paid any tax so far with being below the threshold.

I would like to take out a further £18,000.00 over and above the £12,570.00 that I'm currently projected to withdraw during the current tax year. This would be a one off drawdown payment, and it would take me up to £30,570.00 for the year. Online calculators indicate that a total of £30,570.00 over 12 months would attract £3,600.00 in tax, but I wondered if a larger one off withdrawal like this have any negative tax implications, resulting in a larger tax bill than the £3,600.00 above? Or would withdrawing it over the 8 months remaining of the tax year instead, rather than as a one off withdrawal, make any difference?

Many thanks.

Dazed_and_C0nfused

Badknee said:

Hi.

I would be grateful for any advice about potential tax implications regarding one off drawdown pension withdrawals. 

By way of background I have already taken my tax-free lump sum and have subsequently been making monthly withdrawals from my drawdown pension for just under 12 months now. I have been under the tax threshold throughout as my monthly withdrawals have been £1,047.50 a month. Accordingly I've not paid any tax to date and so far during the current tax year I've withdrawn a total of £4,190.00. I am taxed on a cumulative basis, albeit I've not paid any tax so far with being below the threshold.

I would like to take out a further £18,000.00 over and above the £12,570.00 that I'm currently projected to withdraw during the current tax year. This would be a one off drawdown payment, and it would take me up to £30,570.00 for the year. Online calculators indicate that a total of £30,570.00 over 12 months would attract £3,600.00 in tax, but I wondered if a larger one off withdrawal like this have any negative tax implications, resulting in a larger tax bill than the £3,600.00 above? Or would withdrawing it over the 8 months remaining of the tax year instead, rather than as a one off withdrawal, make any difference?

Many thanks.

If it's form the same pension and you remain on a cumulative code it's of no real consequence tax wise.

Take £18k in one go, presumably in tax month 5 and you are only on annual income of ~£46.5k so no higher rate tax would be deducted anyway.

Assuming you aren't Scottish resident and haven't applied for Marriage Allowance.

Badknee

Thanks for responding so quickly as the cut off for amending the income instruction this month is imminent. It's a relief to find that there's no negative tax implications. Thanks once again for your advice Dazed_and_C0nfused (it's not the first time!). 

Dazed_and_C0nfused

Badknee said:

Thanks for responding so quickly as the cut off for amending the income instruction this month is imminent. It's a relief to find that there's no negative tax implications. Thanks once again for your advice Dazed_and_C0nfused (it's not the first time!). 

Actually my calculator has had a meltdown in this heat 🥵

Assuming you are on the normal emergency tax code of 1257L then your basic rate threshold at month 5 (month to 5 September) is £20,949.

So £18k + five x £1,047.50 would nudge you into higher rate territory.  But the extra 40% tax would be refunded in month 6 as the threshold then is £25,139 and another £1,047.50 would drop you back into being liable at basic rate only.

Badknee

😁 Thanks for the explainer. I'm really grateful. 

Dazed_and_C0nfused

Don't forget you will lose all of the savings starter rate band by doing this (£5,000 interest taxed at 0%).

Badknee

I didn't know that. I am really glad that I asked for advice! Thanks again. 

molerat

My calculation is that you will have £4056.73 total tax deducted in Aug taking home £14990.77 then in Sep you will receive a refund of £457.73 taking home £1505.23 with your £1047.50 withdrawal.  For the majority of the remainder of the year you will receive £1047.70 per month as a 20p tax refund will be due. 

Badknee

Ah thanks so much molerat, that's really very helpful of you indeed. Very kind. Cheers.