Tax Deducted From Pensions
Now that over-55’s can take advantage of the new pension freedoms, there will be a lot of cash being withdrawn from retirement funds.
Pension providers are obliged to deduct tax from 75% of the sum withdrawn.
In most cases, they will not hold a tax code for the customer and there will be no P45 available to pass to them.
An emergency tax code will then be applied. On an emergency code, just one month’s personal allowance will be used and anything over £3,500 will have some of the withdrawal taxed at the higher or upper rates of tax.
When deciding whether to take monies out of your pension, you should always look at the tax effect. You also need to be aware of the temporary tax effect of an emergency tax code. You will always get a temporary effect back, but you may have to wait until some time after the tax year-end to get it.