Jill's full story
How we calculated Jill’s tax liability
Jill earns around £10,000 a year and her Personal Allowance is £11,000. She also has state pension benefits of £8,093.80 (weekly state pension of (£155.65 for 2016/2017) which makes her income this year £18,093.80
Jill wants to take all of her £40,000 pension pot in cash. Up front Jill will get 25% of this as a tax-free lump sum of £10,000, the remaining £30,000 will be taxed.
Initial tax calculation
- Personal Allowance £916.67/£11,000
- To be taxed at rate 20%: £2,666.67 (Tax due £533.34)
- To be taxed at rate 40%: £9,833.32 (Tax due £ £3,933.33)
- To be taxed at rate 45% £16,583.33 (Tax due £7,462.50)
- Total Tax due £11,929.17
This means that initially Jill will get a lump sum of £28,070.84. However, Jill may have paid too much or too little tax at this stage. To make sure she pays the right tax, Jill must contact her local tax office (or HMRC) and let them know she has taken her pension pot all in cash. If Jill had other money purchase pension plans she contributed too, any future contributions that receive tax relief will be limited to Money Purchase Annual Allowance (MPAA) – currently £10,000 p.a. If, MPAA applied, she would need to notify the providers of any other money purchase pension plans within 91 days of receiving the cash payment.
End of year tax position
Jill's total income for the year is £58,093.80. This is made up of the £40,000 lump sum from her pension pot, her income of £10,000 and her state pension benefits of £8,093.80.
Her tax liability for the year, taking into account her total income, should be £8,437.52. When Jill cashed in the pension pot, tax of £11,929.17 was deducted and she paid income tax of £1,418.76 on the £10,000 she earned and so has paid tax of £13,347.93. This means she has overpaid tax in 2016/2017 and is due a refund of £4,910.41.
If Jill had been a higher rate tax payer the outcome may have been different. For example, if she earned £65,000 and had state pension benefits of £8,093.80, her tax liability for the year would have been £31,055.92. However she would only have paid £30,366.69, an underpayment of £689.23.