Drawdown and Tax

DE_612183

My wife is looking to drawdown a lump sun prior to the end of this financial year.

She is looking to take out about £17k

The calculation is £17k - TFLS = £4250

Balance £12750 is equal to her personal allowance - and as she has not "earned" any money this year that should be tax free as well.

We assume that Nest will treat the £12750 and tax at the rate of 20% so take off £2550 which we then have to get back from HMRC.

1. Is that the way Nest work - or can we tell them her personal allowance so she gets the whole sum?
2. If we have to claim back - how long does it take HMRC to process this?

Thanks

RacingDriver

An emergency tax code is usually applied to the first withdrawal, as HMRC won't allocate a tax code to the pension until after the first withdrawal

Sometimes it works to take a small withdrawal first to trigger the tax code, then take the larger withdrawal - this avoids having to reclaim overpaid tax

Are you sure personal allowance is £12,750 not £12,570?

redped

I applied online at the end of December to claim tax back from a lump sum pension payment, received a letter at start of this month asking for my bank details (which they hadn't asked for on HMRC's website when applying, as the site said they would send a cheque (come on, its 2026!), and when I phoned them with the bank info I was told it could take another three weeks for the payment to actually be made. So overall it is currently taking around two months, although that will vary depending on how busy they are when you apply.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/6655000/drawdown-and-tax

Presumably you actually mean £12,570, not £12,750. And that will only be relevant if she hasn't previously applied for Marriage Allowance (so it applies for this tax year).

For first payments a BR tax code is normally only used for pensions taken under the "small pots" rules, which this isn't.

You don't tell the pension payer anything about tax codes they follow the HMRC procedure. Which would be to use the emergency code, 1257L, on a non-cumulative code.

There is nothing she has to claim back, HMRC will automatically refund any overpaid tax when they review things later this summer.

https://www.gov.uk/tax-overpayments-and-underpayments

molerat

She can take £16760 with £12570 being the taxable amount. If there is no code currently set for that pension the first withdrawal will be taxed at 1257LM1 with £4034.70 tax being deducted (E&W). If there is currently a code allocated she would likely have to wait until after March 6th to get the full benefit of that code. It's bit late in the year to do a double dip, take a small amount below £1048 taxable to get a code allocated and the remainder in March so the correct tax for the year is deducted.

Grumpy_chap

I note that the OP carefully says

"equal to her personal allowance - and as she has not "earned" any money this year that should be tax free as well."

If she has unearned income that may also create a tax liability. Interest received may still be within the specific allowances.

What are all sources of income to consider?

kempiejon

Like others said £16760 is the number. In my experience claiming over-paid tax on a flexibly accessed pension via your online tax account is easy and you get the cash soonest. Last year took about 10 weeks because of an error about 5 weeks including Christmas closedown this year problem free. Or you can let HMRC hang on to your money until they get round to it.

I think this is the detail https://www.gov.uk/guidance/claim-back-tax-on-a-flexibly-accessed-pension-overpayment-p55

DE_612183

Thanks folks - sorry about the 12750 / 12570 mis-type on my part.

Also the bit about earned income is actually ALL income.

So she takes £16760

https://forums.moneysavingexpert.com/discussion/comment/81881092#Comment_81881092

Why is the tax £4074 ?

molerat

https://forums.moneysavingexpert.com/discussion/comment/81881181#Comment_81881181

Oopps, fat fingers, £4034.70. On a code of 1257LM1 £1048.26 is tax free, 20% on the next £3142, 40% on the next £7287 and 45% on the remainder.

german_keeper

We take a UFPLS payment from my wife's NEST pension every month. The process is fairly simple and when you put the amount in the relevant box it then tells you how much tax will be deducted. It should of course be as described above but the amount should be given before you press the confirm button.

DE_612183

https://forums.moneysavingexpert.com/discussion/comment/81881201#Comment_81881201

Ah, so they take one twelth of the allowance and apply that to the payment ( as if I was doing that every month even though it's a one off ).