Hefty tax on a pension is something most people will want to avoid, to give them more for their retirement. In later life, many people will wish to start their drawdown – withdrawing some cash from their pension pot. Some will be doing this for the first time this year to start their post-work journey.
However, this could trigger what is known as an emergency tax code, meaning a person will pay tax on all of their income above the basic Personal Allowance.
This can be a default error if HMRC does not have the correct up-to-date information about a person.
HMRC states those on an emergency tax code can check their payslip. If on an emergency tax code, it will show:
But to avoid an unwelcome shock, there could be a sensible move to take with one’s pension.
“But a better way around it is to take a small initial sum when you start accessing your pension of, say, £100, to avoid a tax bill on the whole amount you want to take out.
“Your second withdrawal can then be for the amount of income you require and this should be taxed at the correct rate.”
Those who do end up paying emergency tax should call HMRC as soon as they can.
From this point, the Revenue should be able to process a refund to help people get back the sum they are entitled to.
This could be, for example, about a person’s previous income or pension.
Those who have started a new job should provide their new employer with their P45 from their previous role.
If a person does not have one, then their employer should ask them for the information they need instead.
Those who have just started receiving the state pension should check their tax code online to make sure it is inclusive of the state pension.
If it is not, then Britons will need to update their details in the tax code online service or by contacting HMRC.