View more on these topics

Alan Higham: Tax doesn’t need to be taxing

Rules on taxing ad hoc pension withdrawals from April could certainly be clearer.

Alan-Higham-MM-Peach.jpg

There has been much scratching of heads over the latest guidance from HMRC on how providers must deduct tax on ad hoc pension withdrawals from 6 April. It is fair to say it could be clearer.

Most will be aware pension withdrawals outside the element allowed as a tax-free lump sum (usually 25 per cent of the fund) suffer income tax in the usual way. Providers are expected to deduct tax in a way likely to exceed a person’s actual tax liability, leaving the person to claim it back from HMRC.

It is best to consider two types of people who might want an ad hoc lump sum.

Client A asks for a lump sum payment of £24,000 in April 2015. Unless the client has a P45 for the current tax year, the provider will tax the pension under emergency tax coding.

Thus 25 per cent (£6,000) will be treated as tax free and the remaining £18,000 taxed as though it is the first of 12 monthly payments of £18,000: ie. that client A has £216,000 of taxable income. The default will be to apply £10,600 personal allowance so the effective tax rate on the £18,000 will be 36.6 per cent or £6,592 calculated as follows: £31,785 at 20 per cent plus £107,615 at 40 per cent and £66,000 at 45 per cent = 36.6 per cent of £216,000.

This would need to be done whether the client only has £24,000 in total with one provider or more.

In the other scenario, Client B is taking £500 per month from a Sipp of £100,000. We have a tax code for these monthly deductions for the tax year 2015/16. If the client then wants an extra £24,000, we can treat the taxable element of that withdrawal without using emergency tax codes. Providers whose payroll systems do not have the functionality to process two payments in a month by applying the personal allowance in the tax code they hold to just the first payment and not the second will be obliged to treat the lump sum as above under emergency tax rules.

We would thus tax the £18,000 taxable element as though the total income was the £6,000 being received from us along with £18,000, so £24,000 in total as taxable income. Assuming client B has a tax code to apply £10,600 personal tax, we would deduct £2,680 income tax.

In both cases, if the client takes more pension withdrawals later in the year, HMRC will issue a new code to adjust future payments. How this will impact the client remains to be seen once the code is issued.

Clients wanting an ad hoc lump sum need to know they may face a high tax deduction. Client A may have to reclaim several thousands of pounds worth of income tax from HMRC or wait for it to re-pay automatically in the next tax year. 

Alan Higham is retirement director at Fidelity Worldwide Investment 

Recommended

James Priday-700x450.jpg

Strawberry Invest launches managed portfolios service

Direct-to-consumer platform Strawberry Invest has launched a managed portfolios service which investors can access provided they pay in £100 a month. The firm says its new ‘Make it Easy’ offering is designed to help simplify investment by offering an “all-in-one, streamlined customer experience”. It has chosen Architas BirthStar® Target Date funds for the service, where […]

Toby Strauss, Scottish Widows
9

ScotWids plans £10k minimum for non-advised drawdown

Savers with more than £10,000 in their pension pots will be able to enter into a Scottish Widows drawdown contract without an adviser, chief executive Toby Strauss says. In July last year, Money Marketing revealed Scottish Widows was planning to launch a simplified drawdown product. Now the provider is firming up its offering. Customers with over £10,000 will […]

FCA interior 620x430
2

Cherry picking and systemic weaknesses: Why Aviva Investors was fined £17.6m

Aviva Investors operated systems which were open to abuse and allowed traders to “cherry pick” funds, the FCA has found. Earlier today the FCA fined Aviva Investors Global Services £17.6m for systems and controls failings that meant it failed to manage conflicts of interest fairly. From 20 August 2005 to 30 June 2013, Aviva Investors […]

MM-CPD-Centre-700.png

The Technical Quiz: 26 February

To help you to keep up with the fundamentals of tax, retirement and financial planning, try answering these questions.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. I have heard that HMRC are aware of this and are looking at ways to work around it. It would not do any good to the popularity of the new regime if people withdrawing 20k are charged 45% tax and a loss of their personal allowance. Therefore I feel that those with withdrawals may be taxed at 20% on the taxable sum with further tax to pay if they are or become a higher rate taxpayer. This is the case with savings interest, so why not with lump sum withdrawals?
    Mind you, initially companies like Fidelity may have to do the calculations manually for those without a tax code. Better take on more staff and buy them a calculator!

  2. If they have a BR PAYE coding then the problem goes away, and indeed may result in a deferred tax bill at the higher rate (s)?

  3. Watch complaints rocket.

  4. I agree Phil. However if the above situation is actually the case then I think that the vast majority of these complaints will be regarding the “advice” these people received from Pensionwise/MAS/CAB. The press will have a field day

Leave a comment

Close

Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm

Email: customerservices@moneymarketing.com