Even small withdrawals from pensions next April could trigger the highest rate of income tax, according to analysis of draft guidance from HM Revenue & Customs by NFU Mutual.
Under the new guidance, pension providers will be instructed to use an emergency tax code on flexible withdrawals from pensions unless they receive a P45 or a tax code for the person making the withdrawal.
Commenting on the draft guidance, Sean McCann, Chartered Financial Planner at NFU Mutual, said: “This could result in the bulk of some pension withdrawals being taxed at 40 or 45 per cent. Some people may never have paid such a high rate of income tax in their working lives and may not be able to reclaim their overpayment until at least April 2016.
“This is unexpected and will alarm people planning to cash in some or all of their pension next year. The new rules may make pensions more flexible and generally more attractive, but there are some pitfalls. People should be taking financial advice if they want to make the most of their money.”
Sean explained that there are still some unanswered questions which mean the tax consequences of accessing a pension from April 2015 without first making a plan or taking advice are likely to be significant.
“Under an emergency tax code, a pension withdrawal would be treated as a monthly income even if there were no plans to make any more withdrawals during that tax year,” he explained.
“Higher rate income tax of 40 per cent would start to be paid on withdrawals as low as £4,700. The 45 per cent rate, usually only paid on incomes above £150,000, would kick in for people withdrawing more than £17,834 in one go.”
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