HMRC has clarified how tax codes work for pensioners after concerns were raised about people being placed on higher tax rates. The tax authority responded to a customer query on social media regarding emergency tax charges applied to private pension withdrawals.
Understanding Emergency Tax on Pensions
A customer asked HMRC: "Can someone please enlighten me regarding emergency tax charges, over and above the normal income tax rate when withdrawing from a private pension?" HMRC first asked whether the person was withdrawing the entire pension pot as cash or taking regular payments. The individual confirmed they had been drawing down regular payments for four years.
General Pension Tax Rules
HMRC outlined general tax rules for pensions: "Up to 25 per cent of pension withdrawals are tax free. The remaining 75 per cent is taxed as income at either: 20 per cent (basic rate), 40 per cent (higher rate) or 45 per cent (additional rate), depending on what rate you pay tax at."
What Is Emergency Tax?
The taxpayer indicated they were already aware of these rules and asked specifically about "emergency tax." HMRC explained: "Emergency tax is the tax we apply when we don't yet have enough information about your income or tax situation. We use a temporary, cautious code to avoid under collecting tax." HMRC also provided a link to more information about emergency tax codes on the Government website.
How Tax Codes Affect Your Payments
Your tax code determines how much tax you pay on your income, whether from pensions or employment. You may be placed on an emergency tax code if HMRC does not have all your correct and up-to-date details. This can lead to paying the wrong amount of tax.
Guidance on the gov.uk website states: "Usually, your tax is worked out based on your total income so far in that tax year. If you’re on an emergency tax code your tax is worked out based on what you’re paid in that week or month only. You get taxed as if you’re paid that amount every week or month of the year. This could mean you pay the wrong amount of tax."
What to Do If You Think Your Tax Code Is Wrong
You can find your tax code through your personal tax account on the Government website. If you believe it is incorrect, you can update your details using the Check your Income Tax online service. Alternatively, you can call HMRC's income tax helpline at 0300 200 3300, open Monday to Friday from 8am to 6pm.
