Lump sum payment of a cashed-in small pension - how will they tax this?

KentGirl61

I currently get a very small monthly dependant's pension and have received an offer to exchange this for a taxable lump sum payment. I can work out the probable payment after the basic rate 20% income tax and it would probably be equivalent to 14 years of the current monthly pension. My only concern is that this lump sum if accepted will all be paid in one month - won't this take me into a higher tax band for that month? Assuming a higher tax rate is applied the month it is paid how is my tax adjusted so I only end up paying the correct tax due on my total income for the complete tax year? I read some advice that seemed to suggest the excess tax gets adjusted each month through the year but being retired I can't see that any over-deducted tax could get fully refunded by March next year? Any clear advice and explanations would be very appreciated.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/6664498/lump-sum-payment-of-a-cashed-in-small-pension-how-will-they-tax-this

Could this payment take you into a higher tax band for the tax year as a whole?

Do you have any other PAYE earnings or pensions (ignoring the State Pension).

marginalrate

The tax is calculated over the whole tax year, not just the month the payment is made.

In practice, when a large one-off payment like this is processed through PAYE, it’s often taxed as if that level of income will continue for the rest of the year. That can mean too much tax is deducted initially.

However, HMRC will then reconcile your total income for the year and adjust things so you only pay the correct amount overall.

If you have other PAYE income or pension, any overpaid tax may be refunded through adjustments to your tax code during the year. If not (which is often the case when retired), the balance is usually repaid after the end of the tax year once HMRC completes its calculation.

So you may see a higher deduction in the month the lump sum is paid, but you shouldn’t end up overpaying tax for the year as a whole.

It may also be worth confirming with the provider exactly how the lump sum will be taxed, as treatment can vary depending on the type of pension and how it’s being commuted.