http://www.chaptersfinancial.com/assets/downloads/RetirementOptions.pdf
It is interesting to note that, from 06 April 2015, a change has occurred in the way that income tax is applied to pension benefits that are withdrawn from a pension arrangement as a lump sum.
As it stands at this time, you should maintain a normal personal allowance via your tax code (the standard personal allowance for the 2015/2016 tax year is £10,600). Thereafter, you will pay income tax at a rate of 20% on income up to £42,385 and at a rate of 40% on income up to £150,000. For income over this level, the income tax rate applied is 45%.
HMRC has asked pension providers to divide the income tax band allowances by 12, dependent on the number of months that have elapsed during the tax year, and then apply income tax at the highest marginal rate accordingly for any single payment.
As an example, if someone was to withdraw £20,000 gross as a single lump sum in April 2015 from their pension plan, the following may occur (example only):
- The standard personal allowance of £10,600 would be divided by 12 (£883.00).
- The next level (20%) of £31,785 gross would be divided by 12 (£2,648.75).
- The 40% tax band would be divided by 12 up to £150,000 (£8,967.91).
- The balance would be taxed at 45% (£7,500 gross).
In this example, the initial income tax charge on the payment of £20,000 gross could be approximately £7,116.40. This is obviously a lot more than if just a basic rate tax charge of 20% had been applied (£4,000). This ‘emergency taxation’ will be automatically refunded, although this may only be at the end of the tax year in the absence of a P45.
This effectively gives the government immediate cash flow at higher marginal rates with the opportunity to then reclaim the higher rate tax back, if the various limits noted above are not exceeded, by using an HMRC P55 form.
As these are new arrangements, it is unclear as to how long an income tax reclaim may take, although a 30 day turn around has been indicated if using the P55 form (not guaranteed). In the meantime, you should be aware that you may find that the tax take on any single lump sum pension contribution is higher than anticipated, effectively using ‘emergency taxation’ and also that it may take some time to receive the increased tax funds back.
You may wish to consult with your accountant/tax advisor before making any single large withdrawals from your pension savings, although these are important points for cash flow purposes.
A link to the new HMRC P55 claim form is noted here:
https://www.gov.uk/government/publications/flexibly-accessed-pension-payment-repayment-claim-tax-year-2015-2016-p55
Chapters Financial is not responsible for the content of external web pages
No individual advice is provided during the course of this blog and if you would like to know more about the way pension benefits can be made available to you, then please speak to the team at Chapters Financial in Guildford and Woking.
Keith Churchouse BA Hons FPFS
Director, Chapters Financial Limited
Chartered Financial Planner
Certified Financial Planner
ISO22222 Personal Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.
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