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Pension tax refunds reach record highs

Pension tax repayments have reached record highs, but are you one of 17,238 who are paying more tax than you actually owe?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Getting hit with an unexpected tax bill is one of life’s nasty surprises. But what really adds insult to injury is paying more tax than you actually owe.

Between 1 April 2019 and 30 June 2019, HMRC repaid a record £46,793,765 to retirees who had paid too much tax on their pension savings. That’s enough to cover 772,174 run-of-the-mill family weekly food shops.

In total they processed 17,238 tax reclaims on pension withdrawals alone, meaning an average repayment of about £2,700 per person.

Although tax might not be the first thing that springs to mind when you’re planning how to spend your retirement pot, understanding how it works before you take money from your pension could significantly reduce your tax bill.

Please note, whilst we are able to provide you with information to help you make informed decisions we are not tax experts. If you’re unsure if a course of action is suitable for you please seek tax advice.

Understanding tax bands

After you take your tax-free cash (usually 25% of your pension), which is accessible from age 55 (57 from 2028), any withdrawals are treated as income and added to any other income you’ve received in the same tax year.

Most people have a tax-free personal allowance of £12,500 for the current tax year (2019/20). Any amount above this will be taxed either at the basic, higher or additional rate.

Getting to know the different tax bands, can help you manage your withdrawals.

Income tax rates and bands

Band Taxable income Tax rate
Personal allowance Up to £12,500 0%
Basic rate £12,501 to £50,000 20%
Higher rate £50,001 to £150,000 40%
Additional rate Over £150,000 45%

Pensions and tax rules can change and any benefits will depend on individual circumstances. If you’re a Scottish taxpayer, income, tax bands, and tax rates will differ. The personal allowance can vary depending on your earnings.

Taking large payments from your pension could push you into a higher tax bracket. But you can spread your withdrawals to reduce your tax bill.

Spreading your pension payments

Every April your tax allowances refresh. You’ll get a new personal allowance and any income you’ve received in the previous tax year gets forgotten about for income tax purposes. So make sure you use this to your advantage.

For instance, let’s say you were already receiving £10,000 income a year, and you wanted an additional one-off payment of £50,000. If you took this out in one tax year, you’d pay £11,500 in tax. But if you spread the £50,000 withdrawal across two years (£25,000 in each) you’d only end up paying £9,000 tax in total. That’s an extra £2,500 in your pocket instead of the taxman’s.

Remember, tax rules and allowances depend on your individual circumstances and can change from one year to the next.

Watch out for the emergency tax code

When you first take a taxable income from your pension, it’s likely that your provider will use the emergency tax code. This is a temporary code that assumes you’ll be withdrawing the same amount each month, and doesn’t take into account any other income you’ve received. This often results in the incorrect amount of tax being initially deducted.

What might the emergency tax code mean for your withdrawal?

Drawdown (tax-free cash already taken) UFPLS (25% of lump sum paid tax-free)
Single withdrawal Tax deducted Payment to you Tax deducted Payment to you
£1,000 £0 £1,000 £0 £1,000
£5,000 £958 £4,042 £542 £4,459
£10,000 £2,958 £7,042 £1,958 £8,042
£25,000 £9,531 £15,469 £6,719 £18,281
£50,000 £20,781 £29,219 £15,156 £34,844

Our emergency tax calculator can also help you estimate how much tax might be deducted under the emergency rate.

If you’re planning to take a large payment, you might want to wait until your pension provider has your correct tax code. It could save you time, money, and the unwanted task of completing any tax reclaim paperwork. In fact, if you took out anything over £13,542 you’ll be taxed the equivalent of someone who normally earns £150,000 or more a year.

Typically HMRC should send your correct tax code after you’ve taken your first flexible pension payment so you may need to request a smaller payment first.

What to do if you’ve paid too much tax

If you think you’ve overpaid tax on a pension payment, you have a number of different options. You can either complete a self-assessment to reclaim the tax you’re owed, or wait until the end of the tax year and HMRC should contact you to arrange a refund. If you want to reclaim it before then, you’ll need to complete a form.

Navigating your way through a maze of online forms can be both dull and time-consuming so we’ve narrowed it down.

If you’ve withdrawn your entire pension and have no other income, you’ll need to complete a P50Z form. If you’ve withdrawn your entire pension and have other sources of income then you should complete a P53Z form.

Alternatively, if you haven’t withdrawn your entire pension and you don’t plan to take any more pension income in the tax year you’ll need to fill in a P55 form.

Useful tax forms

If you want to find out more about reducing your tax bill in retirement, or how tax works, download our free guide now.

How to save tax in retirement

Find out more useful tax saving tips.

Claim my free guide

What help and guidance is available?

What you do with your pension is an important decision. We strongly recommend you understand your options and check your chosen option is right for your circumstances. If you’re unsure take advice or seek guidance.

The government provides a free and impartial service to help you understand your retirement options – more on Pension Wise.

This article isn’t personal advice. If unsure, please seek advice. We offer a range of information and support to help you plan your own finances or advice if specifically requested.

If you have any questions call our experts on 0117 980 9940. They’re available six days a week: Monday-Thursday 8am-7pm, Friday 8am-6pm and Saturday 9:30am-12:30pm.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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