As new pension rules come into play from April 2015, experts fear that thousands of unsuspecting taxpayers could be faced with large, unexpected tax bills.

The new rules will mean that people can take money from their pension whenever they like, from the age of 55. However, tax will be paid on the amount taken at the marginal rate, which for many could result in paying
tax at the higher rate for the first time, or even being catapulted into the self assessment system.

When a person decides to withdraw a lump sum from their pension fund, the first 25 per cent is tax free. The remainder of the amount is taxed at your marginal rate. However, many people will be unaware that their marginal rate could be increased to the higher rate as their annual income, plus the lump sum, could exceed the current threshold for basic rate tax. If you are a higher rate taxpayer, you could even find yourself paying 45 per cent.

What are the risks?

Experts are worried that thousands of people who have paid income tax at the basic rate throughout their life could end up with a large tax bill, as their income has suddenly thrust them into the higher rate tax bracket. This would mean that a tax return has to be completed, to calculate how much would be due on the pension amount.

If you normally pay tax through the Pay As You Earn system, you may not realise why you have been sent a tax return to complete, and could end up with an instant penalty if the return is submitted after the deadline.

Don’t get unnecessarily lumped in the higher bracket

If you’re a basic rate taxpayer, take small lump sums on a yearly basis, making sure that your total annual income remains below the threshold. For 2014-15, the amount of annual income that will be taxed at basic rate of 20 per cent is the personal allowance of £10,000 plus £31, 865. Any income over this amount will be taxed at the higher rate of 40 per cent. Income for a higher rate taxpayer consists of anything above the personal allowance £10,000 plus £31,865 but below £150,000. Amounts above this will be taxed at 45 per cent.

That’s not all; remember that the value of the personal allowance is reduced once your income exceeds £100,000.

The new pension changes are complex and, when deciding on the best course of action, you may need pointers from an advisor. Contact the team here at The Accountancy Partnership, and let us know if you will be affected by the pension changes next year.

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About The Author

Karl Bilby

We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!

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