Up to 25% of your cash sum payment can be taken tax free with the remainder liable to tax under the pay as you earn system (PAYE).
We will tax the remainder of your cash lump sum payment under the emergency tax rate (ER) or the basic rate tax rate (BR). This will depend on the size of your lump sum amount and whether you have received cash from any other pension savings previously.
If your fund is considered a ‘small pot’, which applies if the fund is below £10,000, then 25% of your fund will be tax free and 75% will be taxed at the basic rate (BR). (This is assuming you have not taken more than 3 ‘small pots’ previously). If your fund is not considered to be a ‘small pot’ then the lump sum will be taxed at the emergency rate (ER).
For non-small pots: Phoenix is not always able to accommodate using the existing PAYE code we hold and even where it is used, it does not always follow that less tax will be deducted rather than using the emergency tax rate, as this will depend upon the size of the payment, the timing of that payment and the existing PAYE code. Eventually the actual tax due on this payment will be settled between you and HM Revenue & Customs (HMRC).
It is important to understand that ultimately your cash lump sum will be taxed on your marginal rate however, initially you may be under or over taxed. Shortly after the end of the tax year HMRC will automatically assess the tax you have paid on the lump sum along with any other sources of income you may have. HMRC will contact you directly regarding any under or over payment.
However, if you wish to contact HMRC before the end of the tax year to consider your tax position immediately then you need to complete a HMRC form obtained from www.gov.co.uk, this would be either a P50Z if you have no other income except state pension or P53Z if you have other sources of income.
If you have a Phoenix Life Individual Pension Policy you can use our tax calculator to give you an indication of what you would receive from your policy if you were to take the entire amount as cash.
Please be aware that by taking a cash lump sum payment this may impact your entitlement to means-tested state benefits and if you require tax guidance we recommend you contact a tax adviser.