The pensions changes that came into play in April 2015 have been massively beneficial for those aged 55 and over. Not only is there a 25% tax-free lump sum available, no income tax is deducted when an amount is withdrawn within the current annual personal allowance.
Unfortunately, many people’s tax codes aren’t accurate, so they’ve had too much tax deducted from the money they have withdrawn from their pension. Read on to find out if you’ve been paying too much tax, and how to receive a refund.
Providing you had no other source of income, you should have been able to take out up to £11,850 tax-free (the 2018/19 personal allowance). But, if your pension provider hasn’t received an up-to-date tax code, emergency tax may have been applied.
This is only imposed when the withdrawal is above £987.50. But with the current annual personal allowance being twelve times this figure, many have naturally taken out more, resulting in a substantial amount of extra tax being deducted.
A £10,000 withdrawal, for example, will result in a tax bill of over £3,000 when emergency tax is applied.
What do I need to do?
To get a refund, you can choose to wait until you receive an automatic rebate at the end of the tax year. If you want to receive the reimbursement sooner, then complete one of the three reclaim forms available and you should receive it within 30 days.
For those who’ve only taken out a partial amount of their pension, the P55 will need to be filled in. The P50Z form is applicable to people who have stopped working and withdrawn their entire pension as cash. And for those who did the latter but have another source of income, the P53Z will need to be completed.
You won’t have to do anything if you haven’t had any emergency tax applied, as your pension provider has been given an up-to-date tax code from HMRC or a P45 from your former employer.
Keep on top of your accountancy
If you decide to be your own boss after retirement and undertake part-time work, this can affect the amount of your pension you can withdraw tax-free. This can make your accountancy confusing and hard to stay on top of. But with our cloud-based software, you won’t have to waste time trying to work out the calculations.
GoSimpleTax provides tailored tax-saving suggestions and tips, helping to keep your bill to a minimum. It does the hard work so you don’t have to. To find out how we can help, get in touch, or you can test out our tax software for yourself with a free 14-day trial.