HM Revenue and Customs has published an update on the tax implications of the new pension freedoms, including a clarification on confusion around overpayment and in-year repayments from their last newsletter.
Earlier this month, FTAdviser revealed that those individuals who take a sizeable one-off lump sum under new freedoms in April could face a complex wrangle to reclaim overpaid tax, amid confusion over the situation for in-year repayments.
HMRC has now published different scenarios in an attempt to clarify what the tax situation would be. Generally, if the scheme administrator already has a tax code for members and is making payments and were the payroll software is sophisticated, the correct value of tax will be deducted at the appropriate allowance.
However, issues arise where a member has a P45 from a previous tax year, as administrators have to create a separate payroll record and operate ‘emergency code on a month one’ basis.
HMRC warned that where a separate payroll is created and ‘emergency month one’ code is used, this may lead to two sets of personal allowances or tax deducted at higher rates.
Claire Trott, head of technical support at Talbot and Muir, said all providers will be operating the same system, although clients will need to wait in some cases to reclaim tax, because of the way PAYE works.
“But it will mean that there will be no nasty surprises at the end of the tax year after they have spent all their money,” she noted.
“It would not be at all welcome if the reforms resulted in clients being hounded for tax due that they were unaware of at outset. We as providers need to make it clear that when accessing benefit flexibly there may be some initial over payment of tax but they won’t be overcharged in the long run.”
For lump sums, the first 25 per cent of each ad-hoc payment under UFPLS will be tax free and payments made in respect of an individual who dies before reaching age 75 may, subject to meeting the required conditions, also be tax free.
HMRC stated that if the entitlement to UFPLS, drawdown or flexi-access is paid more than two years after the scheme administrator becomes aware of the death, it is subject to the same tax treatment as if the member died having reached age 75, that is in 2015 to 2016, it will be taxed at 45 per cent.
Where the lump sums are paid in respect of an individual who dies having reached age 75, the special lump sum death benefit charge will apply at 45 per cent rate for the 2015 to 2016 tax year.