When our client has taken a lump sum from their pension, they may have had excess tax deducted, which needs to be reclaimed. Although 25% of the pension savings can be drawn tax free, the pension payer normally interprets this being as 25% of any withdrawal, leaving 75% of the lump sum to be taxed at the pensioner’s marginal rate.
What’s worse, if the lump sum is the first withdrawal by that pensioner the pension payer will use an emergency tax code, so the pensioner will have far more tax deducted under PAYE than is actually due.
If the pensioner is not expecting to take further pension payments in the same tax year, he can reclaim the tax on the lump sum using form P53Z or P53. We can submit these forms on our client’s behalf, but not online.
If the pensioner expects to take further pension payments in the same year, the tax repayment should be dealt with through the PAYE code. The tax repayment should be made when the next pension instalment is paid. However, for this to work the pensioner’s PAYE code needs to be adjusted.
The taxpayer can request a new tax code from HMRC through their online personal tax account (PTA), but we can’t access the PTA on behalf of our client. An alternative is to phone HMRC to ask for the code to be changed, – but you will need authorisation to talk to HMRC on behalf of the pensioner.
Written by the Tax Advice Network