No higher rate tax on pension pots under £18,000
Normally when you take your pension you have to buy an annuity – which provides an income for life from your savings.
But anyone with less than £18,000 in total pensions can take the whole lot as cash. The taxman calls this ‘trivial commutation’, the Daily Mail reports.
Wealthier savers with small pots worth less than £2,000 can turn up to two of these into cash.
In the case of these small lump sums, HM Revenue & Customs uses an emergency tax code and charges the higher-rate tax of 40 %.
But the vast majority of savers with small pensions are basic-rate taxpayers. Therefore, they should pay only 20% tax on this sum.
As a result, they often have to fill out a tax return to claim back the additional amount they have paid.
On an £18,000 pot, this left savers paying up to £1,992 too much tax, according to accountants Grant Thornton.
But from April 6 next year, the taxman will charge 20 % on pension lump sums instead. This will ensure no basic-rate taxpayer has to wait for a refund.