Tax adjustment on first drawing a pension.

Roy1234

I've been told by a pension company that upon retirement, and starting to draw a monthly pension income, the initial payments might be net of the emergency tax rate. They said this depends on how quickly HMRC respond to their enquiry with the correct tax code.

If drawing the same amount each month, does anyone have a feeling for how long it'd take for this to become correct? And would any overpayment of tax, due to the emergency rate being applied, be corrected in the following months?

Dazed_and_C0nfused

Unless it's being taken under the small pots rules the emergency code (1257L) is nearly always used on the first payment.

How much is the first (taxable) payment going to be?

What code do you expect to be used in the longer term?

p00hsticks

As I understand it, the 'emergency' code is the standard 1257L code (assuming you are in England).so could well be correct unless you have an additional form of income.

However I've also heard of the BR (20% basic rate) code used for the initial drawdown of a DC pension.

Roy1234

https://forums.moneysavingexpert.com/discussion/comment/81984771#Comment_81984771

Yes the tax code is the default 1257L. It'll be a series of monthly UFPLS withdrawals, so as 25% of each is tax-free, the overall tax rate applied should be 15% of the amount drawn. This should be around £500 pcm, which will be taxable (full state pension uses up personal allowance) but not lifting into a higher tax band.

Roy1234

https://forums.moneysavingexpert.com/discussion/comment/81984776#Comment_81984776

I thought emergency tax was 33%?

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81984780#Comment_81984780

No tax would be deducted from a taxable payment of £500.

The emergency code is 1257L so even when operated on a non cumulative basis the first £1,048 has no tax deducted (assuming pension is paid on a monthly payroll).

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81984801#Comment_81984801

No, it's the same code as most people have, 1257L. Then, depending on how much pension is taken the normal 20%, 40% and 45% rates would be applied.

molerat

An ongoing tax code would normally show in your tax account within a day or two of the first payment. You would then need to check it is correct for your overall situation and get it amended if necessary.

SiliconChip

https://forums.moneysavingexpert.com/discussion/comment/81984801#Comment_81984801

Why would you think that, there is no income tax rate of 33%?

DRS1

You may find you have underpaid tax on the first payment rather than overpaid. If you are getting the full new state pension your normal tax code may be 3L instead of 1257L. The extra tax due may be collected from the second payment of pension.

Roy1234

https://forums.moneysavingexpert.com/discussion/comment/81985041#Comment_81985041

Thanks for the replies. I am puzzled by the 3L code. Google says:

A 3L tax code indicates a very low tax-free Personal Allowance (£390) for the tax year. It means you are entitled to the standard 'L' allowance, but a significant portion of it is being used to cover tax owed on other income (like a state pension or part-time work). It is used to collect tax, often for pensioners or those with multiple income streams.

I assumed that the state pension would use up the £12,570 standard personal allowance, as it's almost the same amount, meaning any further income from a private pension would then be net of 20% tax. Does a 3L code imply the state pension is being excluded from the normal way of taxing income?

However, I realise I've oversimplified my question, as full time work stopped mid April, using say one 12th (or 24th) of the annual allowance if metered out through the year's payments, whilst the state pension will arrive months later than the private pension. So I imagine that means the initial monthly private pension payments may be tax-free, then the arrival of the state pension will lead to that tax-free period being corrected with a K tax code which takes tax back?