HMRC has clarified how tax on pensions works (Image: Getty)
HMRC has clarified how tax rates apply to pensioners after a person got in touch with a question about their retirement income.
The taxpayer contacted the organisation over X saying there were a pensioner with a pension providing an income of £12,647 as well as £1,700 in an “income release policy” and that they were told this would be taxed at 30% if they cashed it in.
responded to explain what tax rates could apply, saying: “This is taxed as income and taking the entire pension pot could mean you pay tax as much as 30% or more depending on the size of your pension pot.”
The tax authority added that this is reviewed at the end of the tax year and that “if excessive tax has been deducted you can claim a repayment”.
The individual further asked what size of pension would attract a 30% tax. They added that “Royal London appear to state that any size pot is taxed at 30% under your rules”.
then encouraged the person to contact their pension provider to explain how they had worked out the tax bill. The group added: “It will depend on how much of the payment has fallen into the higher rate band”.
The taxpayer responded saying they had already done this, and persisted in asking where the 30% tax rate would come from, as they would have an income of around £30,000, meaning they would be on the 20% basic rate for income tax for their income above the personal allowance of £12,570, as far as they could see.
then queried what tax code they were on, asking if it was a BR X, a 1257L X, or another code. The person responded to say their code was 1257LX.
The tax authority replied with some estimations for how much tax they would pay given their tax code. The group explained: “Assuming they use a Month 1 basis on that code, if you took £17,000, we’d expect them to take £6028.20 in tax, that’s £1048.26 tax free, £3141.66 at 20% gives £628.33 tax, £7286.66 at 40% gives £2914.67 and £5522.66 at 45% gives £2485.20 tax.”
But this could be a big overstatement of the person’s tax bill, the tax body warned. Explaining the figures, the authority said: “This is because it’s doing the calculation as if it’s the first month of the tax year, and that’s the monthly tax if you were getting £17,000 every month.
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“If it’s actually just a single payment, then this can take too much tax and you’d need to claim it back or wait until we refunded it.”
If the person had a yearly income of £30,000 from these two amounts, they would pay £3,484.20, over £2,500 more than the estimation this individual had from .
It’s important to check you are on the correct tax code to avoid paying too much or too little tax. One way you can end up overpaying is if you get a one-off payment and it’s treated as your normal monthly income.
You can find out your tax code for the current year on the Government website, through the app or on a recently payslip.
Your code will also be included if you get a Tax Code Notice letter from . You can view your tax code from previous years online or through the app.