Pension drawdown and emergency code

danandgeorgie

I have a stakeholder pension and have already taken the jam; 25% tax free lump sum.  I have current income from part time work of £36K gross.  I want to take another lumpsum of 27K for some home improvements.  My provider says it will have to apply Emergency Tax rates.  As the 36 + 27 would put me into 40% tax bracket will this mean they can take 20% or 40% emergency tax?

Isthisforreal99

danandgeorgie said:

I have a stakeholder pension and have already taken the jam; 25% tax free lump sum.  I have current income from part time work of £36K gross.  I want to take another lumpsum of 27K for some home improvements.  My provider says it will have to apply Emergency Tax rates.  As the 36 + 27 would put me into 40% tax bracket will this mean they can take 20% or 40% emergency tax?

Neither, the code used will be personal allowance on a month 1 basis meaning 1/12th of your personal allowance will be utilised, 1/12th of your basic rate band and the rest at 40%, maybe even 45%. You would be best trying to spread the withdrawal over tax years to avoid going into the 40% tax bracket.

Edit to add: A £27k withdrawal taxed on emergency basis will result in tax deducted of £10,528 so £16,471 net

On-the-coast

Are you still contributing to a pension? (I.e what will your current taxable income be at end of March?)

with your current plan you’ll pay some tax at 40% and some at 20%. About 30% tax taken from your total withdrawal. Possibly all at 40% initially but would resolve itself back to the correct 40/20 mix in March / April automatically. 

Clearly this is a tax inefficient plan. 

Could you take half now and the rest in mid April?   That would save you paying any tax at 40% 

Dazed_and_C0nfused

danandgeorgie said:

I have a stakeholder pension and have already taken the jam; 25% tax free lump sum.  I have current income from part time work of £36K gross.  I want to take another lumpsum of 27K for some home improvements.  My provider says it will have to apply Emergency Tax rates.  As the 36 + 27 would put me into 40% tax bracket will this mean they can take 20% or 40% emergency tax?

The emergency tax code is 1257L and the pension provider will use this on a non cumulative basis for the first (taxable) payment.

So on £27k you will pay no tax on a little (~£1k) then a mix of 20%, 40% and 45% tax on the rest.

You will get any excess tax back in due course but you will end up paying 40% tax on some of it.  Could you not spread the payment across two tax years?

NB.  The above assumes you aren't Scottish resident for tax purposes.

danandgeorgie

Thanks all I do find this confusing!  On the coast my taxable income at the end the year will be approx 36k minus 12.5K allowance thus 23.5K  What is the most I can safely take now to avoid 40% or higher tax?  Please

Dazed_and_C0nfused

danandgeorgie said:

Thanks all I do find this confusing!  On the coast my taxable income at the end the year will be approx 36k minus 12.5K allowance thus 23.5K  What is the most I can safely take now to avoid 40% or higher tax?  Please

If your P60 will show taxable earnings of £36k and you aren't Scottish resident and have no other taxable income then you will have £14,270 of the basic rate band left.

Isthisforreal99

danandgeorgie said:

Thanks all I do find this confusing!  On the coast my taxable income at the end the year will be approx 36k minus 12.5K allowance thus 23.5K  What is the most I can safely take now to avoid 40% or higher tax?  Please

You are better looking at it as £50,270 is the higher rate threshold, assuming you are not in Scotland. But if you are currently making pension contributions in your current job this may impact.

Also note that taking taxable money from the stakeholder will trigger MPAA thereby reducing what you can pay into a pensiin scheme in future.

danandgeorgie

I currently contribute to a LGPS.  Does that any effect?

Cobbler_tone

Yes. Your taxable pay is the relevant number. e.g. you might earn £36k but only have £23k of taxable pay, so your £27k would be at 20%. It'll come down to how much you continue to pay into your pension.

Dazed_and_C0nfused

danandgeorgie said:

I currently contribute to a LGPS.  Does that any effect?

Yes, it likely means your £36k is not the relevant figure.  LGPS uses the net pay method for pension contributions so a salary of £36k might only equate to say £33k on your P60, meaning you have more basic rate band available.

Your payslips should give you a good idea of what your taxable pay is, compared to your salary.