Potential tax trap on pension withdrawals – have you overpaid tax on pension withdrawals?
Under the pension freedoms which were introduced in April 2015, the over 55’s have the ability to withdraw lump sums from their pension funds before they start taking regular income or purchase an annuity. This can lead to unexpected tax consequences.
How will a lump sum be taxed?
Generally, 25% of any lump sum payment is tax-free, with the remaining 75% being taxable at your marginal rate.
If you arPe still working, you may already be liable to higher rate tax. Dependent upon your overall income levels, this could lead to you falling into the 60% income tax trap, which for 2017/18 relates to income between £100,000 and £123,000.
In addition, when drawing a lump sum in the first half of the tax year, you may not have a clear picture of your expected overall income levels. It is therefore likely that your pension provider will be forced to use an emergency tax code, the effect of which could result in a significant amount of tax being withheld, whilst not being due.
I’ve overpaid tax, how do I get it back?
There are a few options:
- For those already within self-assessment, any excess tax withheld from the lump sum payment, will be factored into your overall income tax calculations and any net repayment made following submission of your tax return.
- If you are not within self-assessment, HMRC should perform a PAYE reconciliation following the tax year end, after which, they will send you a P800 tax calculation detailing any repayment owed to you. This calculation is usually sent to you within 6 months of the tax year end.
- To speed up the repayment process, forms are available from HMRC’s website which may enable you to reclaim the refund within the same tax year. These forms can also be accessed and completed via your Personal Tax Account (PTA) https://www.gov.uk/personal-tax-account
If you are worried you have overpaid tax on pension withdrawals, we can assist with checking this and, if necessary complete any refund claims. Should you wish to discuss your circumstances before making a withdrawal please do get in touch