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Tax Code Issue

Practical Issues
StayinAlive
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Tax Code Issue

#709203

Postby StayinAlive » February 2nd, 2025, 9:55 am

Firstly, apologies if this has come up before as I thought I understood the issue - clearly not.
I take occasional lump sums out of my pension as UFPLS's. To cater for this I have a tax code for the specific pension provider of 750T. According to HMRC web site this means " you can earn £7,500 each year tax free. You will pay £0.00 income tax over the year". So far, so good.
I recently requested an amount (first of the current tax year) of less than £7500 and I had tax deducted from the payment. OK, I can reclaim it back from HMRC but that's not the point. I don't understand why any tax was deducted, given the statement above. (I do not intend to make another withdrawal this year).
So, two questions. Was the pension provider correct in this situation and how can I avoid a similar situation next year?
TIA

seagles
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Re: Tax Code Issue

#709206

Postby seagles » February 2nd, 2025, 10:18 am

I seem to remember that if you take an amount one month they "assume" that you will be taking that sum every month. Thus the tax. I am sure others will come along to conform or not this.

robbelg
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Re: Tax Code Issue

#709211

Postby robbelg » February 2nd, 2025, 10:55 am

The code is applied over the year, ie 7500/12=625 per month
so if in month 3 you take less than 1875 you won't pay any tax but if you take more the extra will be taxed

In subsequent months the calculation is (Total taken so far) less (number of months*625) to decide the tax amount

Rob

DrFfybes
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Re: Tax Code Issue

#709215

Postby DrFfybes » February 2nd, 2025, 11:31 am

Yes, as above.

Just out of interest, was the tax deducted based on the tax free amount so far this year (9 months of £7500 = £5620) being exceeded, or based on an assumption you'll take £7500/month for the rest of the tax year?

Presumably the tax code should mean you can take £10k UFPLS tax free as the first £2500 is tax free anyway?

I have this joy to come, I think I'll take the UFPLS in March because that means at least HMRC don't have time to screw up that year's tax codes.

Paul

Gersemi
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Re: Tax Code Issue

#709218

Postby Gersemi » February 2nd, 2025, 11:36 am

robbelg wrote:The code is applied over the year, ie 7500/12=625 per month
so if in month 3 you take less than 1875 you won't pay any tax but if you take more the extra will be taxed

In subsequent months the calculation is (Total taken so far) less (number of months*625) to decide the tax amount

Rob


That's right. When you are getting regular payments (eg when you are working) if you get a large amount in one month (say a bonus) and pay too much tax because of this, you get refunds in the subsequent months along with your pay. However I have never received a tax refund on its own this way, so I think you're stuck with reclaiming from HMRC.

londoninvestor
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Re: Tax Code Issue

#709265

Postby londoninvestor » February 2nd, 2025, 4:59 pm

Gersemi wrote:That's right. When you are getting regular payments (eg when you are working) if you get a large amount in one month (say a bonus) and pay too much tax because of this, you get refunds in the subsequent months along with your pay. However I have never received a tax refund on its own this way, so I think you're stuck with reclaiming from HMRC.


If you overpay through PAYE in a job (for example, you leave a job before the end of the tax year, and don't get another in that tax year), then HMRC will eventually refund the overpayment without you claiming it, through the P800 process. From what I remember, this tends to happen a good few months into the next tax year.

I'm guessing (but not 100% sure) that the same process would apply for pension income. You'd probably get the cash quicker if you proactively reclaimed it though!

abbeymeadster
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Re: Tax Code Issue

#709272

Postby abbeymeadster » February 2nd, 2025, 5:33 pm

I did this last year - took a one-off payment out of a private pension at the very end of March with an associated tax code which should have meant that no tax was deducted. You would think it was obvious that no more payments could be made before the end of the tax year, but no - tax was still deducted! I pro-actively reclaimed it and the good news was that I received the refund within 3 weeks.

This is definitely quicker than if you wait for HMRC to recalculate. My son's girlfriend has just this week received a cheque from HMRC for tax she apparently overpaid through PAYE in the 2022/23 tax year :lol: That's 22 months.

StayinAlive
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Re: Tax Code Issue

#709306

Postby StayinAlive » February 2nd, 2025, 7:58 pm

Thanks everyone, especially robbelg as first to come up with the answer (including example!). A considerable time researching on the web didn't find that for me.
For DrTfybes - yes, I originally told HMRC that I would be taking £7500 as income for the year (so a UFPLS of £10000 total). That's why they gave me the 750T code. As it has turned out, due to more-than-expected savings interest, I've had to tone it down to a total UFPLS of £8700 i.e. £6525 as income and £2175 as tax free. So, as we're in month 10 the "allowance" is 7500/12 *10 = 6250. I have therefore taken out (6525-6250) = 275 over the allowance. Had I waited another month there would have been no tax deducted. Good luck in March,

Gersemi
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Re: Tax Code Issue

#709325

Postby Gersemi » February 2nd, 2025, 10:12 pm

londoninvestor wrote:
Gersemi wrote:That's right. When you are getting regular payments (eg when you are working) if you get a large amount in one month (say a bonus) and pay too much tax because of this, you get refunds in the subsequent months along with your pay. However I have never received a tax refund on its own this way, so I think you're stuck with reclaiming from HMRC.


If you overpay through PAYE in a job (for example, you leave a job before the end of the tax year, and don't get another in that tax year), then HMRC will eventually refund the overpayment without you claiming it, through the P800 process. From what I remember, this tends to happen a good few months into the next tax year.

I'm guessing (but not 100% sure) that the same process would apply for pension income. You'd probably get the cash quicker if you proactively reclaimed it though!


My experience in taking out a lump sum from my pension is that HMRC ask you to complete a tax return. I'd only withdrawn the £3600 that was the result of investing the £2880 available to non-taxpayers, so my income was well under the Personal Allowance. I did have a small amount of taxable investment income, but nowhere near enough to make me liable to tax (indeed part of my PA is transfered to my spouse). Most of my savings and investments are of course tucked away in ISAs, and the remaining amount should be squirreled away before I start to receive my DB pension.

I've learnt to wait until July, when the cumulative code means I get the pension payment without getting tax deducted. Still have to complete the tax return though!


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