Providers may not be forced to apply the ‘emergency’ tax code to individuals accessing their pension flexibility from April, which could save a bill of thousands of pounds for those affected, as long as their systems are up to scratch.
A clarification provided by HM Revenue and Customs to enquiries made by self-invested pension provider AJ Bell stated that emergency taxes do not need to be applied where a tax code is held for an individual and the provider’s systems can separately report the flexibly accessed element.
It states that if this is the case, providers would not need to apply a ‘month 1’ rate, which would multiply any payment and apply tax on the annual equivalent.
Concerns had been raised that such emergency taxes would effectively need to be applied to all savers accessing their pension flexibly from April. The emergency rate will still apply for those accessing for the first time for whom the provider does not have a tax code.
Alan Higham, retirement director at Fidelity, previously told FTAdviser sister title the Financial Times that this could result in someone seeking a lump sum of £20,000 paying tax on the £15,000 taxable element as if it was recurring each month, resulting in an effective tax rate of more than 36 per cent.
Under the new rules, individuals should pay tax on any flexibly accessed element of their pension at their prevailing marginal rate.
HMRC has clarified previous guidance that where pension providers already hold a tax code number for the member, it will be acceptable to use that tax code number as long as the provider’s payroll systems can cumulate payments and take account of tax allowances already used.
The system would also need to be able to separately identify, and quantify, the flexibly accessed element of any pension payment, so that the provider can report this separately.
Andy Bell, chief executive of AJ Bell, said that this clarification is sensible and important for advisers and their clients.
“If providers had been required to apply the emergency tax code to large numbers of pension payments the consequences for those utilising the new rules would have been significant.
“Potentially large numbers of basic rate taxpayers, who may not previously have experienced the need to complete a tax return, would initially have been overtaxed, and would have needed to go back to HMRC to make a reclaim.”
He added that there will still be issues where providers do not hold an individual’s tax code, so advisers will need to ensure that tax codes are given to pension providers before any large withdrawals are made.
“They will also need to check whether providers’ payroll systems can cope with the new requirements.”
Separately, AJ Bell told FTAdviser it will be offering the ad hoc lump sum option, known as uncrystallised fund pension lump sums and dubbed by the firm as ‘hufflepuffles’, from April.
It had previously sought to simplify terminology by offering savers lump sum access under what it termed ‘full withdrawal’ flexi-access drawdown. The firm has complained that the variety of terminology being brought in under the rules will confuse consumers.
Mr Bell said at the time: “Pension savers are punch drunk with acronyms, but at least most of them relate to terms which the customer understands. This tongue twister of an acronym is reflective of the rush in which this legislation has been introduced.”
ashley.wassall@ft.com
