Pension Freedom Launches Tax Pandemonium.
Are you over 55 and poised to withdraw some of your newly available pension money?
Plans in place? Getting the mortgage paid off? Taking that big holiday?
STOP!!!
Before you go any further, just be aware of the tax implications…it’s not as simple as the original ‘provide your tax code’ instruction from your pension providers. You’re going to need your P45.
This month, the government ‘freed’ citizens from the shackles of fixed annuity income pensions and are allowing autonomy over how pension funds are used. Hailed as a victory for individual choice and financial liberty, it is predicted that thousands of people from the age of 55 will be using the new system to access their money.
To abate fears of potential lost revenue, Chancellor Osborne clarified that tax would still be owed on ¾ of each pension fund. As these plans unfolded, taxpayers were informed by their pension providers that they simply needed to produce their tax code at the time of their withdrawal to have the correct amount of tax deducted. “Simples!”
Unfortunately, not so simple in practice…
If you retired before the tax year started or are still in work and want to make a withdrawal you will be paying an ‘emergency tax’. Now is a good time to sit down … this is a rate of 45%. Yes, 45% – all because you don’t have a P45.
Her Majesty’s Revenue and Customs are insisting that everyone must produce a P45 at the point of withdrawal as it is the only evidence documenting how much tax an individual has paid in that tax year. Without it, the Tax Office would rather charge a high emergency fee that they have to repay, rather than be faced with chasing taxpayers for money that may already be spent by the time the tax bill is received.
The problem with this rule is that you only receive a P45 when you get your full pension or leave employment. The main consequence of HMRC’s decision is that most taxpayers accessing their pension money will not have a valid P45, will be paying far too much tax and will then have to go through the rigmarole of reclaiming the overpayment amount.
Pension Companies’ hands are tied
The Telegraph reported that more 12 of Britain’s major pension companies will consider emergency tax to be the standard rate because of their directions from HMRC.
An Aviva spokesperson answered a lot of the immediate questions that spring to mind when considering this situation; “These rules establish that where a customer does not have a valid P45 an emergency tax code is required. We are required to use only the tax codes supplied by HMRC. It is not permitted to use tax codes from any other sources or any other tax information supplied by a customer.”
So, no, you can’t just talk to your pension provider about your own situation and no other evidence will make any difference because of the rules dictated by HMRC.
So, how much will this emergency tax rate cost you?
Jonothan McColgan works at Combined Financial Strategies and he has done some, rather scary, sums.
- If you withdraw £30,000, your emergency tax bill will be £8,970.
- As a basic rate taxpayer you will be overcharged an average of £4,470.
- If you are retired with no income and no P45, you will pay £6,590 more than necessary.
- A higher rate taxpayer will pay £29 too little tax.
That is the flip side of the emergency tax coin – you could also end up paying too little tax and have to cough up even more at the end of the tax year.
As Ros Altman, an independent pensions expert, says, “A lot of people are going to get a nasty shock when they see how much tax is going to be deducted from their funds. The tax office has made it very difficult for pension companies to apply the right amount of tax – many people will be very angry. This is clearly unfair and there should be a system where people can write to the tax office before they withdraw money.”
Her last point is full of the common sense that appears to be missing from the implementation of this policy. Why can’t we expect that the precise amount of tax owed is deducted accurately at the point of withdrawal? Taxpaying savers have all of the necessary information to share with their pension providers, it just requires HMRC’s agreement.
What about getting the overpaid tax back?
Crucial question and HMRC gave a very confident answer, “Claimants presenting their 2015/16 P45 to their pension provider will pay the correct tax. In the event that they don’t, any discrepancy will be settled within 30 days of HMRC being notified.”
Considering that HMRC are estimating 20 weeks as the processing time for current tax rebate claims, this is decidedly unrealistic.
Mr McColgan agrees, “The new freedoms are great changes to pensions but there will be complications. You should be prepared to wait a few months for HMRC to make redresses, however, as they will have a huge volume of cases to process.”
That’s an avalanche of new work for the already understaffed, overworked Tax Office who seem to be struggling to resolve the existing claims backlog. It currently takes at least double the amount of time to get bog standard, legitimate rebates back to taxpayers. So it would seem unwise to rely on receiving any emergency tax rebate within the mere 30 days the Tax Office suggests for this entirely new phenomenon.
It would seem entirely wise to proceed with caution if you are accessing any of your pension money. Unless common sense suddenly has a break through, HMRC’s stringent adherence to producing a P45 will scupper many people’s plans. Just make sure of your figures to avoid unexpected disappointment. And if you do find yourself needing a tax rebate, you don’t have to put yourself through the complicated process alone.
