Everything You Have To Know About Calculating Pension Drawdown Tax
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 As if that’s not enough, your withdrawn funds won’t be taxed!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 of||Tax deducted||Payment to you|
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.
If you live in the UK and you want to claim or cash in your pension via drawdown, you’ll be liable for income tax if your payment exceeds your allowance, that is, your income tax allowance. Your pension provider taxes any drawdown income from your pension. This goes according to the PAYE system in the UK.
A drawdown pension can be a good idea for you if you want your investment to grow, but still, be able to withdraw funds when you need to. Because you’ll be able to keep an amount of money invested, but at the same time get a monthly income as you need to or want to.
Simply put, a pension drawdown is a way to go when you want your investment to grow, but still, have access to the funds within your pension savings. You can gain access to your pension funds and receive small amounts at different times as an income, while still having your money invested. You’ll be able to withdraw money from your drawdown pension, but you’ll be charged with income tax according to you allowance.
You can wait until the end of the year when it will come back automatically, or you can fill out a claims form for the HMRC. The option is yours. However, you don’t have to worry about losing your money. You’ll get that money back sooner or later. It’s not down the drain.
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:
|Band||Taxable income||Tax rate|
|Personal Allowance||Up to £12,500||0%|
|Basic rate||£12,501 to £50,000||20%|
|Higher rate||£50,001 to £150,000||40%|
|Additional rate||over £150,000||45%|
It is possible to have your pension savings or investment growth, all the while having access to your funds from the age of 55!