Can someone clear the fog of this income tax/ pension payment question please? I am a retired person who has recently submitted a claim for the cashing-in of one of my pension policies. This has been done as a UFPLS payment and I have received both the net figure from the provider and have subsequently submitted a tax refund claim to HMRC, which has been successful. I cannot understand the reasoning behind the amounts that have been deducted and provided to me and when I asked the pension provider to explain, they have suggested that the calculations and differences in my figures is down to the fact that they have to use an emergency tax code to work out the tax that they deduct at source. They have suggested that I look at the free calculators that are available online and indeed the income tax figure that the pension provider has deducted accords with these online calculators; but how?!!
My understanding, which is clearly wrong, was that out of my UFPLS payment, 25% of it would be tax free, 75% of it would be taxed and the taxable bit would be liable to 20% income tax. As I am below the current personal allowance threshold of £12,500, I would be eligible to claim all of the tax back, which I have, but the figures are odd to me!
The figures that I thought would be applicable in this case are: UFPLS gross cash in claim of £4447, 25% tax free = £1111.75, 75% taxable = 3335.25 Tax to be deducted = (£3335.25 x 20%) = £667.05
However, the figures that the pension provider has used are: UFPLS gross cash in claim of £4447, tax free = £1043, Basic rate tax = £2293 Tax to be deducted = (£2293 x 20%) = £458.60 These figures are born out if I enter the £4447 figure in The Prudential's Emergency Tax Tool (https://www.pru.co.uk/xpf_calculators/emergency-tax-tool/), and others I have used. I received a net payment of £3988, which when added to the tax deducted gets to £4447, which I understand.
What confuses me is:
1. if my pension provider has to use an emergency tax code, why is their figure for income tax lower than mine? I would have thought that my calculation assumes that all of the taxable element is liable to income tax at the basic rate and a larger tax figure arrived at.
2. where does the £1043 'tax free' figure come from? I can see that £1043 + £2293 = £3336 but why is there effectively a second tax free element contained in what I understood was going to be taxed in its entirety - i.e. 100% of the taxable figure of £3336?
3. clearly there are implications for me where the emergency tax code comes into effect, but given that in the previous tax year I paid no income tax and therefore have a tax code of 1250L (I think), I don't quite see why I have not seen £667.05 income tax deducted
Sorry if all this seems trivial, I just cannot find a simple answer to this.
Thank you for your help.