I am on a modest university pension (£25,555) and do a bit of freelance work (perhaps worth £4,000), while this April I took £12,500 out of a small additional pension pot. This morning I received a letter from HMRC, telling me my tax code for the current year was K36211X.
I discovered that HMRC has estimated my taxable income to be £677,717 and estimated PAYE income tax is £291,072 (more than 10 times what I actually pay). HMP, London
Pension rules are baffling. You are allowed to withdraw up to a quarter of your pension pot tax free. When you make a withdrawal, the remaining 75% will count towards your annual income for tax purposes, which means that even if you are a basic rate taxpayer, a large withdrawal could push you into a higher tax band and mean you lose up to 45% to HMRC.
If you do not have a P45 with an up-to-date tax code when you withdraw money from your pension, the first payment will be taxed on an emergency code. HMRC says any overpayment will be refunded within 30 days and a correct code issued.
If you need help email Anna Tims at your.problems@observer.co.uk or write to Your Problems, The Observer, Kings Place, 90 York Way, London N1 9GU. Include an address and phone number.
