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10 February, 2015   |   By Peter Walker and Ashley Wassall - FT Adviser   |   Market News


Focus falls on one-off lump sums for post-April pension tax

Individuals who seek to take a sizable one-off lump sum under new freedoms in April could face a complex wrangle to reclaim overpaid tax, amid confusion over the situation for in-year repayments.

Claire Trott, head of technical support at Talbot and Muir, warned that for those not already in receipt of an income from their provider an emergency tax code will be used, which will assume the amount paid is a newly recurring monthly instalment and tax it accordingly.

This could see taxes of as much as 45 per cent applied to any amount above £12,500, with 40 per cent likely to kick in on amounts of over £3,500. These amounts could even be lower if the individual is already receiving state pension.

Ms Trott added that any overpayment may not be able to be reclaimed until the end of the tax year, as “if the fund is not extinguished there is no P45 to be used to reclaim the tax mid-year”.

However, AJ Bell Technical Resources manager Gareth James said it should be possible to get an in-year refund, which he said already happens regularly where a provider makes an initial drawdown payment to someone before they have provided their tax code.

He said: “The individual just needs to obtain a cumulative tax code from HMRC – this might be a nil tax code where they have other sources of income that use their allowance – the key is that the tax code is cumulative.

“Once we have that cumulative tax code we are able to make an adjusting payment to the individual for the overpaid tax.”

In response to enquiries from FTAdviser, HMRC explained that rather than have to wait until next April to get their tax refund, individuals can ask for a refund within the tax year and “if they are entitled to it they will get it”.

A spokesperson added that the PAYE system is constantly updating codes and organising refunds as part of routine work, but could be no more specific on the circumstances in which they would be entitled to an early refund, adding that it depends on the individual.

Ms Trott noted the system effectively allows someone to take an additional lump sum on the same ‘payslip’ which is treated in the same way as overtime payments, with tax reconciled through the remainder of the financial year.

Mr James told FTAdviser that HMRC confirmed that as long as providers have a tax code for an individual they can use it, including for annual and ad-hoc payments whether or not there is an established regular income stream.

He said: “There will be cases where we don’t have a tax code, in particular the first time an individual wants to take benefits, and in these circumstances we have to apply Emergency Code Month 1. If we have been provided with the tax code, we can apply it.”

David Trenner, technical director at Intelligent Pensions, said the issue highlighted the pitfalls of taking flexible payments, adding: “[I] think it falls in the ‘unintended consequences of taking lump sums at start of tax year’ box.”

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