HMRC has issued guidance on state pensioners' tax bills after a concerned query on social media. One taxpayer reached out via X, formerly Twitter.
They asked: "Can someone please enlighten me regarding emergency tax charges, over and above the normal income tax rate when withdrawing from a private pension?"
HMRC responded to first ask if the person would be withdrawing the whole pension pot as cash or if they would be taking regular payments from the pot. The person said they had been drawing down regular payments for four years.
General Tax Rules for Pensions
HMRC outlined some general tax rules that apply to pensions. The Labour Party government's tax authority said: "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 went on to ask what "emergency tax" refers to. HMRC said in response: "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 sent them a link to more information about emergency tax codes on the Government website.
Understanding Tax Codes
Your tax code determines how much tax you pay on your income, whether that is from pensions or from your work. You may be put on an emergency tax code if HMRC does not have all the correct and up-to-date details for you.
HMRC explains: "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."
