Tax implication case studies

Susan, a part time doctor’s receptionist from Bristol, had just turned 55 and was thinking about taking her pension early, even though she wanted to carry on working in her £10,000 a year job.

One of the deciding factors was that her daughter was just about to go to university and Susan thought she’d take the whole pension fund of £25,000 as a cash sum and put it towards her daughter’s fees.

She talked to her pension provider who explained that 25% of the cash sum (£6,250) would be tax free, but based on HM Revenue & Customs (HMRC) regulations they would have to apply an emergency tax rate on the remaining amount of £18,750. With emergency tax applied, this meant that Susan would receive £18,184 directly from her pension provider so would be paying £6,816 in tax on her £25,000 pension fund.

Her pension provider went on to explain that whilst an emergency tax rate would be applied initially, this would not be Susan’s final tax year-end position and advised that she should contact HMRC to check whether she would overpay on her tax for the year.

Susan contacted HMRC and they advised that when taking all of her yearly income into account (£10,000 from her job and the £25,000 lump sum from her pension fund), Susan’s yearly income would be taxed using 20% basic rate tax.

This meant that Susan would therefore be due an overall tax refund.

Please see below for a breakdown on Susan’s final tax year-end position.

How would Susan claim her tax refund?

She could either wait until after the end of the tax year when HMRC will automatically assess the tax she has paid and contact her with a relevant refund payment. Alternatively she could complete the relevant form detailed below which can be found on the GOV.UK website or contact HMRC on 0300 200 3300.

Form P53Z if you have other sources of income.

This case study is a fictional representation of people’s experiences and is for illustration only. They are based on individual pension policies. Everyone’s circumstances are different and your personal circumstances, however similar to the case study, need to be taken into account when reviewing your pension. This case study does not constitute tax advice or advice or guidance regarding your pension and you should seek pension guidance before making any decision.

Personal allowance and tax rates used are based upon rates for 2024/2025.

When care home manager John was nearing his 60th birthday, he thought about taking his full pension fund as a cash lump sum of £25,000 to treat himself and his wife to a luxury holiday, as well as using some of the cash to pay for improvements around the house.

He was still working, with an income of £50,000 a year, and his pension provider explained that 25% of his £25,000 pension fund would be tax free (£6,250) but based on HM Revenue & Customs (HMRC) regulations they would have to apply an emergency tax rate on the rest.

His pension provider went on to explain that whilst an emergency tax rate would be applied initially, this would not be his final tax year-end position and by taking the £25,000 lump sum in addition to his regular income, his total yearly earnings could go into the higher rate tax bracket. John was advised to contact HMRC to check what his final year-end tax position would be.

John went ahead and cashed-in his £25,000 pension policy and after emergency rate tax was applied he received a cheque for £18,184, so had paid £6,816 in tax.

John contacted HMRC to find out what his year-end tax position would be. When they looked at all of his yearly income of £50,000 plus the £25,000 cash lump sum he had received from his pension policy, they confirmed that John had actually overall underpaid on his yearly tax by £330.

Please see below for a breakdown on John’s final tax year-end position.

John also realised that by taking his entire pension savings as a cash lump sum, this had pushed his total yearly income into the higher rate tax bracket which had meant that £18,480 of his £25,000 pension fund had been taxed at 40%.

How will HMRC claim John’s underpaid tax?

HMRC will automatically assess the tax paid after the end of the tax year and contact him directly to correct any under payment.

This case study is a fictional representation of people’s experiences and is for illustration only. They are based on individual pension policies. Everyone’s circumstances are different and your personal circumstances, however similar to the case study, need to be taken into account when reviewing your pension. This case study does not constitute tax advice or advice or guidance regarding your pension and you should seek pension guidance before making any decision.

Personal allowance and tax rates used are based upon rates for 2024/2025.

Linda was earning £35,000 a year working as a college lecturer. As she approached her 55th birthday, she was looking to carry on working but cash in her £25,000 pension policy and take it as a lump sum. When she contacted her pension provider to talk through the option of taking her entire pension savings as cash, one of the considerations was the risk of this taking her earnings into the higher rate tax bracket.

She wanted to make the money work for her as much as possible, so she went away to seek advice from a tax adviser.

She was informed that if she took out the whole £25,000 as a lump sum, the first 25% would be tax free but due to HMRC regulations her pension provider would have to apply emergency tax to the remaining amount. This would not however be her year-end tax position and to gain a final year-end tax position HMRC would add the cash received from her pension fund to any other income she received.

If Linda took the entire £25,000 out in one go and taking into account her £35,000 a year salary, her final year-end tax position would mean she would pay a total of £8,932 tax on her income for the year.

Please see below for a breakdown on Linda’s final tax year-end position if she took the entire £25,000 in one go.

This case study is a fictional representation of people’s experiences and is for illustration only. They are based on individual pension policies. Everyone’s circumstances are different and your personal circumstances, however similar to the case study, need to be taken into account when reviewing your pension. This case study does not constitute tax advice or advice or guidance regarding your pension and you should seek pension guidance before making any decision.

Personal allowance and tax rates used are based upon rates for 2024/2025.