HMRC called on to scrap emergency tax on income drawdown payments

4 August 2022

Advisers have called for emergency tax on income drawdown payments to be scrapped, new research from abrdn has shown.

According to the investment group, a quarter (26%) of advisers said removing the tax would top their wish list of potential changes, ahead of removing other elements such as the tapered annual allowance and the money purchase annual allowance. In total, 59% of advisers said getting rid of the emergency tax fell within their top three priorities.

Current rules mean single or ad-hoc pension payments, or initial payments of regular pension income, are taxed on an ‘emergency month one basis’, often resulting in overpayment of income tax, which most people need to reclaim from HM Revenue & Customs.

In addition, nearly two fifths (39%) of advisers said removing the lifetime allowance was their most desired tax and pension planning change, while 9% cited the removal of the money purchase annual allowance. Abrdn said 4% wanted to prioritise the removal of the tapered annual allowance as a top priority and a further 4% want to move to a flat rate pension tax relief.

Commenting on the findings, Alastair Black, head of industry change at abrdn, said complexity in legislation and tax structures poses a barrier to good customer outcomes.

Black said: “Emergency tax is clearly one of advisers’ biggest frustrations and it could be something that becomes more and more of an issue in our current economic environment with an increase in flexible payments growing likely.

“With factors like rising inflation and increase in the number of people wanting to continue working in retirement, income needs are likely to only vary more and more, potentially meaning more instances of clients making lump-sum withdrawals or changing their regular payments. This could result in being stung by up-front tax charges. If these withdrawals are needed for specific payments they may need to withdraw further income until they can reclaim the overpaid tax.”

Black said it was also not surprising to see advisers in favour of scrapping the lifetime allowance.

Black added: “Constant cuts to the LTA combined with various protections have added to the complexity of an already complex mechanism, and the LTA freeze will drag more pension savers into the LTA net. Despite this, pension saving will still be the most tax-efficient place to save for the vast majority and the LTA shouldn’t be seen as a ceiling – if net returns on savings in excess of the allowance are still greater than saving elsewhere, then some extra tax could be a price worth paying.”

Professional Paraplanner