Just when pensioners think they can enjoy a huge payout with
their retirement fund, it turns out that the government will enjoy
it more. The bigger the retirement fund, the bigger the taxes that
are imposed on it. But that’s not all; it’s also been revealed that
the new pension freedoms will have inaccurate tax charges, and to
avoid paying more than you should, you need to get in touch with
HMRC – hurray!
As pensions are taxed the same way as income, even if you’ve
never earned enough to pay 40% tax, you may suffer a higher tax
rate on your pension because most people will be put on emergency
tax. Such news would make any pensioner think twice before cashing
out a huge part of their pension.
What To Expect
- Pension is taxed similar to income, so the bigger payments
translate to higher tax rate.
- To avoid inaccurate tax charges, pensioners have to negotiate
with HMRC to rectify the incorrect estimation.
- They must provide a P45 form for tax deduction and their
withdrawal to be corrected.
- They would have to pay an emergency levy if they’re still
employed, because a P45 is only issued to those who have left work
or paid their pension in full.
- A tax refund will only be paid at the end of the tax year, and
pensioners who want an earlier payout would have to fill out
additional forms, which will differ from one pensioner to
If there is one word to describe pension withdrawals,
complicated would be it.
How complicated would it be in your specific circumstances?
- The tax-free annual income is Â£10,600
- All earnings have to be combined before tax is calculated.
- If you have no other income and want to take Â£10,000 out of
your pension, you will most likely only receive Â£4,500 due to
emergency tax. You will get a full refund – eventually – but the
upfront payment is only Â£4,500.
Tax On Pension Withdrawal
You can enjoy your pension even before you leave work – you’ve
worked hard for it, after all – but it may not seem as rewarding as
you expected because you’d have to pay an emergency tax of 45% for
every pension withdrawal you make.
How Is Tax On Pension Withdrawal Calculated?
Your allowance is spread evenly throughout the year through what
is known as free pay. HMRC divides it into 52 weekly or 12 monthly
equal parts, depending on how you are paid. Whatever tax-free
allowances aren’t used in a week or month are then carried out to
the next pay period, effectively reducing your tax bill. But
remember that this is only applicable if you can present a P45
form, which is only issued after you resign.
If this is not the case, you would have to fill out three other
forms. P50Z if you withdraw your whole pension pot in one go and
don’t have other income. P53Z if you have other taxable income, and
you prefer to withdraw your entire pension pot. P55 if you only
take out a chunk of your pension and you don’t take another
flexible payment before the start of the tax year 6 April 2016.