Taxation of drawdown

Tax_Slave

My wife will take the max 25% tax free lump from pension this tax year.
She has no other income and thus her tax allowance isn’t used (she had passed over a bit to me as we are married and I pay tax).
Anyway she will for next tax year draw down a further £11,000.
Will the pension company tax her and pass on the remainder and then she claims tax back or will it be passed over without tax deduction?

thanks 
for any replies 

molerat

The first draw will be taxed using the code 1257LX meaning £1048.26 will be tax free and the remainder taxed accordingly.  HMRC will then issue a code to be used going forward.  To limit any tax deduction she could make a first draw of £1048, which will have no tax deducted, and then make further draws within the allowance taking a final draw in March to make the annual total £11319 which will square the tax for the year.

Tax_Slave

molerat said:

The first draw will be taxed using the code 1257LX meaning £1048.26 will be tax free and the remainder taxed accordingly.  HMRC will then issue a code to be used going forward.  To limit any tax deduction she could make a first draw of £1048, which will have no tax deducted, and then make further draws within the allowance taking a final draw in March to make the annual total £11319 which will square the tax for the year.

Excellent - thanks we will do that.
so 1st draw aka the 25% tax free lump will arrive tax free. Then next draw go for £1048, then further draws to get tax allowance. We want to draw down the pension to zero over a few years to avoid her paying tax on it when another pension starts paying that will push her over tax allowance.

DRS1

Any particular reason she wouldn't use what remains of her personal allowance this tax year?  Seems like a waste.

p00hsticks

Tax_Slave said:

molerat said:

The first draw will be taxed using the code 1257LX meaning £1048.26 will be tax free and the remainder taxed accordingly.  HMRC will then issue a code to be used going forward.  To limit any tax deduction she could make a first draw of £1048, which will have no tax deducted, and then make further draws within the allowance taking a final draw in March to make the annual total £11319 which will square the tax for the year.

Excellent - thanks we will do that.
so 1st draw aka the 25% tax free lump will arrive tax free. 

That's not quite correct. The tax free lump sum is a separate thing. You don't say how much is in the whole pension pot. She could withdraw 25% of the whole pot tax free and then also 12th of her tax allowance each month without paying any tax. 

If the pension scheme allows UFLPS she could withdraw more each month, with each part consisting of a 25% tax free sum and a 75% taxable (but under her tax allowance) element. 

Tax_Slave

DRS1 said:

Any particular reason she wouldn't use what remains of her personal allowance this tax year?  Seems like a waste.

 No reason really. I was trying to keep things simple, but maybe if HMRC are going to take emergency tax on the taxable bit, then we may as well do that. I presume we can claim the tax back as soon as the payments arrive?
aka Get the £18,000 tax free part (25%) then pay emergency tax on the other £11,000 and claim that tax back (when I say emergency tax I’m referring to tax code in previous reply).

Dazed_and_C0nfused

Tax_Slave said:

DRS1 said:

Any particular reason she wouldn't use what remains of her personal allowance this tax year?  Seems like a waste.

 No reason really. I was trying to keep things simple, but maybe if HMRC are going to take emergency tax on the taxable bit, then we may as well do that. I presume we can claim the tax back as soon as the payments arrive?
aka Get the £18,000 tax free part (25%) then pay emergency tax on the other £11,000 and claim that tax back (when I say emergency tax I’m referring to tax code in previous reply).

You don't have to claim anything back, HMRC will automatically refund any overpaid after the end of the tax year.

Taking the annual equivalent of £132k as a first payment is going to result in a mix of no tax, 20%, 40% and 45% tax and that severity can easily be avoided if you would rather pay less tax at the start.

squirrelpie

Whwn you say "she had passed over a bit to me as we are married and I pay tax" do you mean she passed over part of her tax allowance (i.e. Marriage Allowance)? If so the numbers might work out a little bit differently.

Also you say she's going to take the tax free cash this tax year. Do you have a good use for that money, or are you just thinking that's the first thing to do?

Everybody has concentrated on optimising what you've planned to do, but it may be worth stepping back and examining what you want to achieve overall, I think.