Tax code change after cashing in pension

sally_lc

Hi All,

I am wondering if anyone can help me understand HMRC processes please. I am currently taking a small DB pension, and have just cashed in a DC pension all in one go. Allowing for the tax free lump sum, this keeps me Just below the higher rate tax threshold.
I have just received a notice from HMRC that they have lowered my tax code, due to untaxed savings on interest, which I think is wrong as I transferred 20K immediately into an ISA and have done the sums and I will not get more than £1000 interest on savings this year.
[They have also taxed me at 40% rather than 20% on the pension lump.]

 My questions are:
- Regarding the tax code change,  is there a process by which banks report my actual interest received at end of tax year, and so HMRC will then automatically correct the tax code next summer , or do I have to go through some process to sort it ?
- I also need to reclaim the overcharged 20% on the lump. I want to do this asap, but am wondering if given there are two tax confusions here, what the best way is of sorting it out ? Perhaps if I fill in the forms to reclaim this 20%, it will correct the expected savings interest / tax code aspect also ? 
 I would hope that when I reclaim the 20% I can transfer it to an ISA in my husbands name to avoid tax, but I suppose they will want to change my tax code again for that lump, so the whole process will start again. Would it simplify things to wait to reclaim the 20% till next tax year ?
 
Sorry if I've used too many words for what must be quite a common scenario, but I'm a bit green about this sort of thing. Any advice much appreciated. 

PS As an aside, , it feels unpalatable that they can charge me now on Expected future interest, rather than actual figures 

QrizB

sally_lc said:

I am wondering if anyone can help me understand HMRC processes please. I am currently taking a small DB pension, and have just cashed in a DC pension all in one go. Allowing for the tax free lump sum, this keeps me Just below the higher rate tax threshold.
I have just received a notice from HMRC that they have lowered my tax code, due to untaxed savings on interest, which I think is wrong as I transferred 20K immediately into an ISA and have done the sums and I will not get more than £1000 interest on savings this year.

Are you sure this isn't about last year's untaxed interest, rather than this year's?

Dazed_and_C0nfused

sally_lc said:

Hi All,

I am wondering if anyone can help me understand HMRC processes please. I am currently taking a small DB pension, and have just cashed in a DC pension all in one go. Allowing for the tax free lump sum, this keeps me Just below the higher rate tax threshold.
I have just received a notice from HMRC that they have lowered my tax code, due to untaxed savings on interest, which I think is wrong as I transferred 20K immediately into an ISA and have done the sums and I will not get more than £1000 interest on savings this year.
[They have also taxed me at 40% rather than 20% on the pension lump.]

 My questions are:
- Regarding the tax code change,  is there a process by which banks report my actual interest received at end of tax year, and so HMRC will then automatically correct the tax code next summer , or do I have to go through some process to sort it ?
Yes and no.  How do you think they knew to update your current tax code?  Once a tax year has ended your tax code is pretty much irrelevant.  HMRC will check the tax you have paid for 2025/26 next summer/autumn and if you are due a refund notify you.

- I also need to reclaim the overcharged 20% on the lump. I want to do this asap, but am wondering if given there are two tax confusions here, what the best way is of sorting it out ? Perhaps if I fill in the forms to reclaim this 20%, it will correct the expected savings interest / tax code aspect also ? 
It is quite unusual to have paid 40% on the whole of the pension income.  Can you provide the figures from your P45?  That isn't to say ther can't some refund likely to be due

 I would hope that when I reclaim the 20% I can transfer it to an ISA in my husbands name to avoid tax, but I suppose they will want to change my tax code again for that lump, so the whole process will start again. Would it simplify things to wait to reclaim the 20% till next tax year ?
Not clear what you really mean here.  What lump?  What process will start again?  You don't have to reclaim anything, if you do absolutely nothing HMRC will notify you of the overpaid tax next summer/autumn once they have all the actual info, including interest details, for 2025/26
 
Sorry if I've used too many words for what must be quite a common scenario, but I'm a bit green about this sort of thing. Any advice much appreciated. 

PS As an aside, , it feels unpalatable that they can charge me now on Expected future interest, rather than actual figures 
That is how HMRC have dealt with things for many many years.  If banks had to supply interest details during the tax year how often would you like your tax code to be updated?  Some MSE posters would be getting new tax codes virtually every day given the number of bank accounts they have where interest is being received!

Replies in bold.

sally_lc

Qriz - yes definitely this year 1) because it says Expected interest, and 2) because I was well under the limit for interest on savings last year

Dazed - thanks this is great .
  - For your first point , I can only think they updated my tax code, for Expected interest, due to recent pension lump payment. There are no other changes. When you say HMRC will refund me next year, I now understand from what you've said that they will have all the info to do so, and be able to sort it out automatically (which is great, as I run a mile from filling in forms about all this sort of thing)
 - For your second point, I have received 25 % tax free, remaining being taxed at 40% (instead of 20%)
- For the third point, I am saying when I reclaim the extra 20% tax charged, it seems to be they would want to decrease the tax code again, to allow for interest I may accrue on this. But your first point renders this question as irrelevant now, as I will just get the correct refund back next year anyway. Thanks for clarifying.

DRS1

I am not sure if this is the right one for you but there is a form for reclaiming tax when you take all your DC pension at one go.  This is a link to it and some explanation
Claim a tax refund when you've flexibly accessed all of your pension (P53Z) - GOV.UK

There are other forms where you haven't taken all the DC pension for example.  Just make sure you use the right one.

Just as an aside the DC pension provider will probably have used an "emergency" tax code not the one which has been changed for your untaxed interest.  That one is probably used by your DB pension scheme.

Qyburn

sally_lc said:

Dazed - thanks this is great .
  - For your first point , I can only think they updated my tax code, for Expected interest, due to recent pension lump payment. There are no other changes. 

If this was your first draw from that DC pension they will probably have taxed on a "month one" basis, as if you were going to receive the same amount every month. Hence some taxed at 40%. This will also have dropped your savings interest zero rate band down to £500.

Dazed_and_C0nfused

Qyburn said:

sally_lc said:

Dazed - thanks this is great .
  - For your first point , I can only think they updated my tax code, for Expected interest, due to recent pension lump payment. There are no other changes. 

If this was your first draw from that DC pension they will probably have taxed on a "month one" basis, as if you were going to receive the same amount every month. Hence some taxed at 40%. This will also have dropped your savings interest zero rate band down to £500.

That is highly unlikely to have happend.

HMRC would look at the income the op has received, the fact that the pension company might have deducted some tax at 40% doesn't make the op a 40% payer for that tax year overall.

Qyburn

You can fill in an online application to get the tax corrected and the overpayment refunded to you, which takes a couple of weeks.

https://www.gov.uk/claim-tax-refund

bjorn_toby_wilde

Piggybacking slightly on this thread, I’m sure I’ve read that taking a small sum first from a SIPP will trigger a tax code from HMRC then subsequent withdrawals will be taxed correctly.

Is that the case and, if so, how small would that sum have to be?

Incidentally OP, I’ve just had the same recoding from HMRC due to expected savings interest but I haven’t made any SIPP withdrawals yet.

molerat

Any taxable withdrawal triggers a tax code allocation or review depending on precise circumstances

sheramber

Have you checked your Personal Tax Account to see what information HMRC hold for your expected income  and interest?