I have an individual who is being paid just above the personal allowance in salary from their main job, with the usual tax code of 1250L, age 64 (will be 65 in 5 months). Their salary is paid equally across 12 months of the year, with very little variance in the number month to month.
They have a small personal (non-occupational, defined contribution) pension of around £32k, which they would like to take out as a lump sum under the flexible pension rules.
So they would receive 25% of that tax free, and the remaining 75% will be subject to their marginal tax rate. They have very little else by way of other pension arrangements and are far from hitting the lifetime allowance threshold.
Overall, they have done due dilligence in terms of the personal financial implications of this and they are determined that withdrawing the pension in one go is what they want to do.
With that in mind, I have two main questions/concerns which I'd love to consult the members here on. I have done some research and have formed some understanding but it would be great to get others' input.
1. Since this would be classified as a UFPLS it would trigger the MPAA threshold. Currently, that is not so much of an issue, but there is the possibility that in future years they may wish to contribute a little more towards other pension schemes than the MPAA threshold of 4k, so avoiding triggering the MPAA would be ideal.
I understand that as long as the individual wishes to access the entirety of the pot, there is no way to avoid triggering the MPAA. I also understand that there is an option to avoid triggering the MPAA if the pot was 10k or below, under the "small pots" rule. Is there any option to access or divide the pot up into three smaller pots of 10k (with a remainder balance of £2k), so as to avoid triggering the MPAA?
2. Assuming the MPAA is a non issue (i.e. they will most likely decide to access the full pot even if it meant triggering MPAA), there is some concern that cashing in the lump sum in one go will impact the PAYE on their main job, which they are going to continue in for the forseeable future (>3 years).
As I understand it, the pension provider will make the payment using an emergency tax code, which would be on a M1W1 basis. Income tax would be deducted on the £24k (75% of £32k) as if it was a regular monthly payment, which would push this person into the additional rate threshold. I am concerned that since additional rate taxpayers are not entitled to a personal allowance, this would impact the PAYE deducted from his main job, which has a tax code of 1250L.
Since the pension lump sum is in fact a one off payment, on an annual basis, the individual is in fact only receiving £12,500 (main job) + £24,000 (pension lump sum subject to income tax) = £36,500, which means that in fact they should be a basic rate taxpayer and would have overpaid tax in this scenario.
I understand that at the end of the tax year, HMRC would refund any overpayments (both the overpayment on the pension lump sum and any potential overpayments on the main job resulting from possible tax code changes). Or the individual could fill out a P50 to reclaim the overpayment intra-year.
I would like to avoid impacting the tax code or PAYE treatment in their main job, as changing their tax code in that role is a major headache, even if it is only temporary.
The individual does not mind being overcharged on income tax from the pension withdrawal, and is happy to wait for HMRC to process automatic refunds at the end of the tax year if necessary. BUT they would like to be able to keep his personal allowance and monthly salary payments from his main job unaltered (i.e. they do not want to lose his personal allowance, or get a sudden increase on income tax deduction in his main job due to being pushed into a higher tax bracket)
Does anyone know if:
a) the emergency tax code issued for the pension would trigger a re-issuing of the tax code for his main job, and
b) does the emergency tax code issued for the pension remove his personal allowance across all other employments (even if it's restored a month later)?
In the event that the changes to the tax code and treatment on their main job is unavoidable, would it be better to wait until say, April 1st (end of tax year) to take the pension payment, so that come April 5th, HMRC would reset his tax code automatically?
Apologies if anything is unclear or if any of the questions are really basic. This is the first time I have looked at how such pension payments interact with an existing job, so I am trying to learn as quickly as I can.