Sate Pension Lump Sum Quandary

Am I Mad ??

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Client has just presented me with a question about the tax payable on his State Pension Lump sum of  £87000. His other income inc the monthly state pension is £11800, which means that he has no tax to pay on the lump sum

As a test I increased the other income to £12501 which produced a Lump Sum tax payable of £17400 caused by the extra £1 over his allowance

Seems very peculiar. Does anyone know the logic behind HMRC playing Father Christmas for pensioners ?? 

 

 

Replies (10)

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Teesside
By Teesside
06th May 2021 12:56

I always thought that you paid tax on the lump sum pension payments at the rate you are currently paying. So if other income is under PA then no tax payable. The lump sum payment does get taken into account for tax bands. Hope I've made some sense.

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By Not Anonymous
06th May 2021 13:10

If only it were quite that simple!

Some individuals with no normal tax liability will still have to pay tax on the deferred State Pension lump sum.

https://www.litrg.org.uk/tax-guides/pensioners/what-tax-do-i-pay-my-stat...

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Replying to Not Anonymous:
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By Hugo Fair
06th May 2021 13:39

What a nightmare!
Thank goodness the number of these lump sum payments still in the pipeline is rapidly decreasing - and will disappear in the not too distant future.

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By Wanderer
06th May 2021 14:00

bernard michael wrote:

Does anyone know the logic ... 

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim74651
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Replying to Wanderer:
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By bernard michael
06th May 2021 14:37

Wanderer wrote:

bernard michael wrote:

Does anyone know the logic ... 

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim74651


Thanks for that
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Replying to Wanderer:
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By bernard michael
06th May 2021 14:38

Wanderer wrote:

bernard michael wrote:

Does anyone know the logic ... 

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim74651


Also thanks for the link. I wonder how the committee arrived at the beneficial ( to the taxpayer) decision
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By brianep
10th May 2021 11:05

Tax is payable at your marginal rate. So if your total income (excluding the lump sum) is below your personal allowance then no tax is payable. But if £1 extra income (but not the lump sum)makes you a basic rate tax payer, you pay tax at the basic rate on the full lump sum. Same process jumping to higher rates from the basic tax rate, £1 extra is all it takes. The lump sum is not added to your income for tax purposes.

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By Homeworker
10th May 2021 11:09

Having taken my state pension, including lump sum, under the old rules last September I know all about this. I was in the fortunate position that my main source of income was salary and dividends from our own company, so I made a point of not taking either last year until March, when I could work out exactly what my total income would be. I did exactly the same calculations and realised that although interest and dividends would be covered by the savings and dividend allowances they are still income. Although "taxable" at 0%, if they took my total income over the personal allowance, the whole of the lump sum became taxable.
The only thing that did not do this were the small amounts paid to charity under Gift Aid, where the 20% tax due is actually a recovery of tax relief already given through paying net of tax.
I managed to save around £8k on this exercise, so thanks HMRC!

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By LindsayRuddock
11th May 2021 10:10

Bernard Michael asks what is the logic.
The logic assumes that continuing to work beyond state pension age and thereby continuing to contribute to the country’s wealth is a good thing not to be penalised. There would be an outcry if a large lump sum accumulated like this and then taken in a single year (as it has to be) were to be added to income for that year hence pushing taxation of the lump sum into the higher tax band.
It’s almost a ‘benefits trap’ . The state pensioner drawing their lump sum is forced to arrange to earn no income other than state pension in the year they take the lump sum. Either no income or loads, there is no viable in-between. Ok, you can earn maybe 2K or 3K but basically the year has to be spent in idleness in order to take advantage of the very substantial benefit of a tax free lump sum. Even worse as Homeworker highlights, small amounts of unwanted income added to state pension for the year could easily tip the pensioner over the personal allowance threshold.
Perhaps a standard 20% income tax on state pension lump sum would be fairer and beneficial all round ? After all, the state pensioner taking state pension while continuing to work a regular job would have had to have paid this amount anyway ?

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Replying to LindsayRuddock:
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By bernard michael
11th May 2021 10:42

LindsayRuddock wrote:

Bernard Michael asks what is the logic.
The logic assumes that continuing to work beyond state pension age and thereby continuing to contribute to the country’s wealth is a good thing not to be penalised. There would be an outcry if a large lump sum accumulated like this and then taken in a single year (as it has to be) were to be added to income for that year hence pushing taxation of the lump sum into the higher tax band.
It’s almost a ‘benefits trap’ . The state pensioner drawing their lump sum is forced to arrange to earn no income other than state pension in the year they take the lump sum. Either no income or loads, there is no viable in-between. Ok, you can earn maybe 2K or 3K but basically the year has to be spent in idleness in order to take advantage of the very substantial benefit of a tax free lump sum. Even worse as Homeworker highlights, small amounts of unwanted income added to state pension for the year could easily tip the pensioner over the personal allowance threshold.
Perhaps a standard 20% income tax on state pension lump sum would be fairer and beneficial all round ? After all, the state pensioner taking state pension while continuing to work a regular job would have had to have paid this amount anyway ?


Interesting.

I would prefer a set tax exemption amount perhaps the same as the CGT relief

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