Pension tax - HMRC refund quandary

dazzer21

I received a letter from the HMRC stating they owe me a £6k refund out of the blue. It says that it's in relation to the 25/26 tax year, which I have yet to submit to my accountant. I have looked into it, and it turns out that it is in relation to a pension policy that I withdrew. I took out the full amount, which in total exceeded the tax-free threshold, so the insurance company paid me the full amount, minus the taxable part, which they then submitted to HMRC on my behalf. It appears that the sum shown in the letter is pretty much the amount the pension company held back. So the question is, is this my money to spend? Was the tax calculation wrong? Or is this in some way going to have to be paid back to the HMRC based upon the information I include about this pension payment on my 25/26 tax return? Do I reclaim it or keep it with the HMRC so I don't spend it before I need to pay it back? Confused. Thanks.

DRS1

Isn't that rather going to depend on the rest of your income and whether you have paid the right tax on that? I don't think you (or HMRC) can just look at the pension in isolation.

Secret2ndAccount

When you cashed in the pension, 25% was tax free, assuming you hadn't taken it at some earlier date. The remaining 75% was taxable, just the same way as salary, profit, or rent. The insurance company doesn't know what other taxes you pay, so they will have taken 20% of it, maybe 40% of some of it. At the end of the tax year, HMRC will have looked at the whole picture, and decided that you paid too much tax - hence the refund. I believe (though I stand to be corrected) that they assume your profits for the year will be the same as the profits from the previous year. So if your accounts for 25/26 look similar to 24/25, it's likely that the 6k refund is about right. If your profits are higher, there will be more tax to pay, though whether you consider that as paying back some of the 6k, or just paying more tax on your profit would be up for debate.

Is there a big mistake and you have to give back the 6k? No

Can you run out and spend the 6k today? No

Is it likely that approx 6k ends up in your pocket? From what you have told us, it would seem so.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82071318#Comment_82071318

You would think though that as the OP is registered for self assessment, that they would wait to receive this before calculating refunds etc .

Secret2ndAccount

I thought about that too. It would all come out in the wash, in the shape of an adjusted tax bill. Maybe that's a bit unfair, since that adjusted payment is not due until January, and OP will likely have been making payments on account based on his regular tax bill. Effectively an employed or retired person would get the refund today, whereas a self-employed person waits until January.