At what rate are annuities taxed?

At what rate are annuities taxed?

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I think that I remember there being a distinction between (using old terminology) a Schedule D annuity and a Schedule E annuity. I thought that the former is taxed at 20% and the latter 22%. Is this correct or have I just got a poor memory?

A client has to complete a tax return every year because 22% is being deducted from an annuity. It leads to a repayment every year and I'm trying to have him removed from Self Assessment, and then avoid having to make a repayment claim by arringing that the appropriate tax code is applied to the annuity taking into account his State Pension.

The Insurance company describes the annuity as Schedule D and states that only a BR or NT tax code can be applied. Is this correct?

How can such a taxpayer avoid having to incur accountancy fees every year?
Tony P

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By barryhallam
25th Nov 2005 15:14

20% !
There are some annuities that have 20% (savings rate) tax deducted.

These are what are known as Purchased Life Annuities (PLAs). Part of the payment made is deemed to be a return of capital (and not taxable) and part is savings income - hence a 20% deduction. An annuitant on low income can apply for no tax to be deducted.

Prior to 1996/97 basic rate tax was deducted from the income element

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By User deleted
29th Nov 2005 09:00

Thank you Michael and Barry
I simply wasn't aware of the 22% or nothing rule concerning Retirement Annuities!

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By User deleted
25th Nov 2005 10:16

Retirement Annuities
This has been a common problem with Retirement Annuities, which usually have tax deducted at source of 22% (or, alternatively, no tax deducted at all).

However, the rules are set to change in April 2007, when it will be possible to have PAYE operated against the Annuity (see, for exemple, the September 2005 news article from the Low Incomes Tax Reform Group (LITRG), which also contains a Link to the HMRC website on the subject).

See also the earlier AWEB Article, from December 2003.

Hope this helps.

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