HMRC has clarified how tax on pensions work after a query from a pensioner who had taken a lump sum from her pension.
The person contacted the authority as they had a pension drawdown account, and had recently taken a lump sum from their pot which they said was “taxable”.
They wanted to know if they could pay the tax off for the amount in total, rather than have it added to their tax bill.
The taxpayer further asked: “This tax has been added to my tax payable for this year. When can I expect to pay this as I have the funds ready?”
HMRC asked them to clarify if they had emptied the pension pot or left anything in. The authority also asked if they had paid tax on the amount when they received it and if not, was the amount they received part of their 25% tax-free portion.
A person can usually withdraw up to 25% of the amount of any pension as a tax-free lump sum, with the maximum amount you can take at £268,275. This does not affect your personal allowance for income tax.
The person said in response that they had not emptied the pot, saying they use the pension as a drawdown and receive a monthly amount from it.
They further explained: “Tax was not paid on receiving it (although I expected it to be) and the whole sum was taxable as I had my tax-free portion when I retired three years ago.”
HMRC replied setting out the standard rules: “As it’s an ongoing source of income, we’d normally tax through the tax code, so I wonder if we have the code correct.”
The authority went on to say that they wouldn’t be able to pay the tax due until HMRC has done the end of year calculation. which starts from mid June.
The group also directed the taxpayer to the Government page where they could set up a personal tax account.
You can use the service to check your income tax estimate, your tax code, and to update your the information that HMRC holds about you.
Your account also shows you how much income tax you have paid in the past five years and to check how much state pension you are on track to receive.
Now is a good time to check if you have any gaps in your National Insurance record that may be worth paying to fill in, towards your state pension.
You can currently top up over an extended period, as far back as the 2006/2007 tax year, rather than up to six years ago, as is usually the case. This offer to top up over the extended timeframe is only available until April this year.
