Pension Drawdown Tax

Everything You Have To Know About Calculating Pension Drawdown Tax

Have you ever wondered about your pension? Are you always hearing about terms you don’t know the meaning of? Well, you’ve come to the right place! We’ll tell you all about pension drawdown and how to calculate your tax.
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Good news! If you’re 55, you can withdraw from your pension. 25% of your pension savings won’t be taxed, but 75% will be income taxed. The taxation depends on your yearly income as well as your current tax rate.

Some Drawdown Tax Rules

Taking the first 25% of your pension funds, or it can also be less than 25%, is a straightforward process. As if that’s not enough, your withdrawn funds won’t be taxed! Even if you are:

  • Withdrawing your funds in smaller bits and pieces.
  • Withdrawing everything in your pension.
  • Earning a stable income (also known as an annuity).
  • Choosing to earn an adjustable income with drawdown1.

Tax is charged when you withdraw an amount over 25%. If this is the case for you, you will be paying tax on all of your annual income. What does this mean for you? And how can you calculate that? In this instance, you’ll be pushed into a higher tax bracket when you withdraw large amounts of money from your savings.

Think about it:

It might be in your best interest to check your current tax rates on your income and personal allowances. The gov.uk website will be a good source of information for you as well. If you have all of this information in mind, you’ll be in the know when withdrawing more than 25% of your pension. And another thing, if you withdraw your funds in sections spread across some time, you might pay less tax! You’ll be in a lower tax bracket.

How Does Paying Tax Work?

Tax will be deducted before any withdrawal is paid under PAYE (pay as you earn)2. This responsibility falls on your pension provider. The first time that you’ll be taxed, an emergency tax code will most likely be used, or a tax code that your P45 documents. Below is a table stipulating how emergency tax impacts withdrawals from your pension:

Single withdrawal ofTax deductedPayment to you
£1,000£0£1,000
£5,000£958£4,042
£10,000£2,958£7,042

Are you a PensionBee customer? If you are, then you will be given an emergency tax code. Then, you’ll only have to pay any unpaid tax to HMRC.

How PensionBee Works With Drawdown

PensionBee makes withdrawals easy peasy! Go to the withdrawals tab in your BeeHive. Indicate what amount you want to withdraw; either the full 25% tax-free amount or any other amount you require. PensionBee makes your life so much easier; all the complicated things surrounding your pension is handled for you. You don’t even need to put your savings into your bank account, that is done for you as well!

Best of all, if you go above the tax-free 25% tax-free, you’ll be informed how much tax you need to pay. Feel free to find some more information about PensionBee.

Common Questions

How Does Pension Drawdown Work UK?
Is A Drawdown Pension A Good Idea?
How Does A Drawdown Pension Work?
How Do I Claim Back Overpaid Tax on Pension Drawdown?

Before We Say Goodbye For Now, Here’s A Few Extra Things You’ll Need To Know About:

Taxable Income, Defined Benefit, Social Security, Long Capital Gains, Pension Fund, and Tax Brackets.

Firstly, you probably know that your income from your pension will be taxed at the normal tax rate if you withdraw or request that income. Secondly, a Defined Benefit (DB) pension plan is a pension plan where your employer gives you a specified pension payment, lump-sum or a combination of those two options. The payment depends on your earnings during your working history, tenure of service and age etc.

Thirdly, Long Capital Gains are deducting your tax-free allowance from your total taxable gains. If you add this to your taxable monthly income. If this amount is within your basic Income Tax level, you’ll need to pay 10% on your gains (or 18% on your residential property). You’ll also pay 20% (or 28% on your residential property) on any amount which is over and above the basic tax rate.

Fourthly, you need to know what a pension fund is if you’re considering taking one out. In the UK there are private pension schemes that you or your workplace invests for you to save money for the future. You can choose between the 2 main types: defined contribution (depends what you pay into it) and defined benefit (based on your income). Lastly, let’s look at tax brackets. They determine what amount of tax you’ll be asked to pay. See the table below:

BandTaxable incomeTax rate
Personal AllowanceUp to £12,5000%
Basic rate£12,501 to £50,00020%
Higher rate£50,001 to £150,00040%
Additional rateover £150,00045%

Conclusively

It is possible to have your pension savings or investment growth, all the while having access to your funds from the age of 55!

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