Tax to pay on my pension lump sum

[acewoodturner]

I am just doing my self assessment return for 23 to 24 and a bit puzzled by the automatic tax calculation.
I worked for an employer for 10 years and my pension paid out when I reached 60 in Sept 23. I took an increased lump sum of £27145 and no tax was paid on it and a reduced monthly payment of £339.32 per month (£2035.92 for the 6 months)
I have ben self employed for several years and recent years I have made a loss. I use the cash accounting method of doing my books using quickbooks.
HMRC are deducting my personal allowance of £12570 and say that tax is due on £14575 which comes to (Scottish rate) £2907.95. I thought that the first 25% of a pension lump sum was tax-free. That would reduce my taxable income to £7789 after PA was deducted and give me a tax bill of £536.18. Can I deduct my business loss of this remaining amount. It seems I cant use previous year's losses either to decrease my tax bill as I use the cash accounting method. I'm sure this was allowed last time I checked.
Am I barking up the wrong tree and go with their calculations?

 

[Paul Kelly ICHYB]

I have a similar question re tax on pension drawdowns, however, my guess is that as you have started to take monthly money out of the pension so it became 'crystalised' and you lose the drawdown benefit.

I think you need to take the drawdown before the regular payments.

What financial advice did you take before taking the lump sum?

 

[acewoodturner]

I didnt take any advice as I thought it was straightforward and I would get the 25% tax free.

 

[Paul Kelly ICHYB]

I didnt take any advice as I thought it was straightforward and I would get the 25% tax free.

Yes, if you do (or do not do) certain things, but, when dealing with all things Government, when is anything straightforward?

Can your accountant shed any light on it?

 

[acewoodturner]

Whats an accountant!
Ive just relooked at their calculations and the bit where it says how we worked out your income tax. The first line is
"Pay, pensions, profit etc (Scottish income tax rate) The way I look at it is if you can take profits into consideration when working out tax, you can also take into account losses as well. this will the give me £29 to pay tax on!

 

[Paul Kelly ICHYB]

If you are self employed, in simple terms, sales minus costs = profit/takings. However, when you start mixing in other income which has a different tax application, it loses its simplicity!

 

[DontAsk]

I am just doing my self assessment return for 23 to 24

I have to say it but you are cutting it fine!

I took an increased lump sum of £27145

So more than 25% of the fund? What would 25% of the fund have been?

I thought that the first 25% of a pension lump sum was tax-free.

That's not correct. A lump sum of 25% of the pension fund can be taken tax free.

If you did not take the lump sum then 25% of each withdrawal is tax free. Only the initial tax free part is referred to as a "lump sum".

The 25% lump sum does not need to be declared on your tax return (google it if you don't believe me). As you took an increased lump sum you only need to declare the difference.

 

[DWS]

Whats an accountant!
Ive just relooked at their calculations and the bit where it says how we worked out your income tax. The first line is
"Pay, pensions, profit etc (Scottish income tax rate) The way I look at it is if you can take profits into consideration when working out tax, you can also take into account losses as well. this will the give me £29 to pay tax on!

An Accountant is someone who would probably help!
No sideways tax relief on your business loss if using the cash basis, you can only carry forwards and use against future business profits.

 

[David Griffiths]

It would be interesting to see how your tax return was completed. Did you put the lump sum received in box 9, which is only for state pension lump sums? Or did you include the the figures in box 11, which is only for taxable lump sums? If you put it in either then you have told HMRC that it's a taxable source, so quite logically they've taxed it.

 

[WaveJumper]

It would be interesting to see how your tax return was completed. Did you put the lump sum received in box 9, which is only for state pension lump sums? Or did you include the the figures in box 11, which is only for taxable lump sums? If you put it in either then you have told HMRC that it's a taxable source, so quite logically they've taxed it.

Yep pretty sure thats whats happened

 

[DontAsk]

It would be interesting to see how your tax return was completed. Did you put the lump sum received in box 9, which is only for state pension lump sums? Or did you include the the figures in box 11, which is only for taxable lump sums? If you put it in either then you have told HMRC that it's a taxable source, so quite logically they've taxed it.

As he has taken an increased lump sum (by which I assume he means more than 25%) he does need to include the difference as taxable.

 

[David Griffiths]

As he has taken an increased lump sum (by which I assume he means more than 25%) he does need to include the difference as taxable.

Assumptions are dangerous. There might well have been a lump sum that was higher than normal under the rules of the employer's scheme, but still within the tax free limits. If it was over the tax free limits the pension company would have deducted tax and issued a P60 at the end of the tax year. And of course he might be she.

And even if the amount that taken was partly taxable, it is only the taxable lump sum that needs to go on the tax form. It seems pretty obvious that the tax free lump sum has been entered, as how else would it have got into the calculations?

I wonder how many other mistakes have been made on the tax return? The answer to the question what is an accountant could well be somebody who knows how to fill in a tax return, as opposed to somebody who thinks they know how to fill in a tax return. Plenty of the latter.