Emergency tax on pensions

If you’re over the age of 55 (57 from 2028) and are planning to withdraw money from your pension for the first time it’s important to understand the tax implications and be aware of when an emergency tax rate on pensions applies.

Pension tax explained

Under the pension freedom rules pension owners are allowed to withdraw the first 25% of their pension balance tax-free. After this, tax is due on the remaining 75% and you will be charged at your marginal rate of income tax.

If you are making a withdrawal over the initial tax-free 25% for the first time, it is likely your pension provider will place you on an emergency tax code, which could result in the overpayment of tax. Pension providers are generally required to do this for the first withdrawal.

At PensionBee, we’ll apply the emergency tax code only on the first transaction. We’ll then apply the correct up-to-date tax code on all future transactions, which we’ll receive from HMRC after the first transaction has been made. You can claim back any overpaid tax by contacting HMRC.

Emergency tax on pension lump sums

In some cases, an emergency tax rate will be charged when you withdraw a taxable lump-sum from your pension. This can sometimes be avoided by providing your pension provider with a valid P45 (which documents your earnings for the year) or by asking HMRC to send the provider an up-to-date tax code. Currently, PensionBee customers will need to claim the difference back from HMRC.

As pension tax works in the same way as income tax, your pension provider will use the Pay As You Earn (PAYE) system to deduct any tax due before you receive your payment. Under PAYE, any payments you receive will be treated as though they will continue to be paid each month like a regular salary or income.

That means that where it is your first payment, an emergency tax rate will be applied to ensure enough tax is being collected against your predicted total earnings for the year (12x your first withdrawal amount). You’ll also only receive 1/12th of your personal allowance, which is the amount of income everyone is allowed to receive before tax is charged.

If your tax code ends in ‘M1’ which stands for ‘Month 1’, you’ll know that your payments are subject to an emergency tax rate pension withdrawal. For most people being placed on pension emergency tax will result in an overpayment of tax which will need to be recouped from HMRC.

Claiming back emergency tax on a pension

You can reclaim emergency tax on pensions by contacting HMRC directly. They will check your tax record and, once you’ve settled any outstanding amounts due, they will issue a new tax code to your pension provider. The new tax code may be used to calculate the tax due on all future withdrawals, offsetting the amount you have already paid, however this is at the discretion of your pension provider.

If, however, you have chosen to withdraw your whole pension pot as a lump sum, claiming emergency tax back from pension payments in future won’t be possible. If you’d like to request any overpaid tax back from HMRC as soon as possible you’ll need to fill out a HMRC claim form. Alternatively, you can wait until the end of the tax year when a tax refund will be generated automatically.

If you have any queries surrounding emergency tax and your pension, feel free to contact your personal BeeKeeper who will be more than happy to help!

Last edited: 06-04-2024

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