HMRC has provided an update on how tax codes function for pensioners, following concerns that some individuals were being placed on a higher tax rate than expected.
Pensioner Tax Concerns Raised
A customer contacted HMRC via social media to ask: "Can someone please enlighten me regarding emergency tax charges, over and above the normal income tax rate when withdrawing from a private pension?" HMRC initially asked whether the person intended to withdraw their entire pension pot as cash or take regular payments. The customer confirmed they had been making regular drawdowns for four years.
General Pension Tax Rules
The tax authority outlined the standard rules: "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."
Understanding Emergency Tax
The taxpayer, already aware of these rules, sought clarification on "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." A link to further guidance on the Government website was provided.
How Tax Codes Work
Your tax code determines the amount of tax deducted from your earnings, whether from pensions or employment. An emergency tax code may be assigned if HMRC lacks your current details, potentially leading to incorrect tax payments. According to the gov.uk website: "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."
Checking and Correcting Your Tax Code
You can check your current tax code via your personal tax account on the Government website. If you believe your tax code is incorrect, you can amend your information using the Check your Income Tax online service. Alternatively, contact HMRC for income tax enquiries by calling 0300 200 3300, Monday to Friday from 8am to 6pm.
