A £1 pension trick could stop you from losing thousands in emergency tax when withdrawing from your pension.
The £1 pension trick that could save you thousands on your tax bill has been revealed – with UK households urged to act. A £1 pension trick could stop you from losing thousands in emergency tax when withdrawing from your pension.
Across the UK, many over-55s are at risk of overpaying tax when they take out lump sums from their pensions. In January, February and March this year, pensioners claimed back as much as £44 million in overpaid tax, according to HMRC, worth £3k per person.
This is all because HMRC had inaccurate tax codes for them when they took cash out of their pensions. But by withdrawing a small amount first – as little as £1 in some cases – HMRC is prompted to issue an up-to-date tax code.
READ MORE UK faces 320-mile wall of rain with ‘half’ of England hit including 16 counties
David Gibb, a chartered financial planner, said: “It’s a hangover from how regular wages are taxed. But for one-off pension withdrawals, it doesn’t make sense – and savers lose out.”
Pensions expert Clare Moffat, from Royal London, said the exact amount needed varies depending on the pension provider. “It could be £1, £50 or £100 – but the idea is to make a small withdrawal first to get a tax code sorted before taking a large sum,” she said.
Helen Morrissey, pensions and retirement spokesman at Hargreaves Lansdown, explained how emergency tax is calculated: “When you’re taxed on an emergency basis you’re treated as though the same amount will be taken on a monthly basis – it doesn’t take into account that this payment is a one-off.
“As a result, the income tax payment is calculated using a twelfth of your personal allowance, a twelfth of your basic-rate tax allowance and twelfth of your higher-rate allowance.
“The remainder will be taxed at additional tax rates, so they are paying tax at much higher rates than they ordinarily would.”
Ms Morrissey added: “The excess tax can be reclaimed by filling out a form, but being taxed in this way can take a significant chunk out of the money you were expecting to receive, [which] could cause you financial hardship or mean you have to change your plans.”
Tom Selby, director of public policy at AJ Bell, said: “We have only just blown out the candles on the cake celebrating 10 years of pensions freedoms. It is simply unacceptable that, after all this time, the Labour Party Government has still not managed to adapt the tax system to cope with the fact Britons are able to access their pensions flexibly from age 55, instead persisting with an arcane approach which hits people with an unfair tax bill, often running into thousands of pounds, and requires them to fill in one of three forms if they want to get their money back within 30 days.”
