The tax you pay on pension withdrawals should be simple, in theory at least. When taking a withdrawal from a money purchase (defined contribution) pension, in most cases you can take 25% of the pension pot tax-free and the balance is then subject to income tax. The tax-free cash you take from your pension pot doesn’t use up any of your income tax personal allowance, which is a standard rate of £11,850 in the 2018/19 tax year. The amount of income tax you pay on the taxable part of the pension withdrawal depends on how much other taxable income you receive in a tax year. Despite this relative simplicity, in practical terms pension withdrawals can result in overpayments of income tax. In fact, new figures from HM Revenue & Customs (HMRC) show than more than £280m of income tax has been overpaid since the start of ‘pension freedoms’ in April 2015.
Time to reform how pension pay is taxed?
This 602 word blog post examines income tax overpayments on pension withdrawals and the forms needed to reclaim overpaid tax from HMRC. Written on 4th May 2018.