UK State Pension - Deferred Lump Sum Tax Implications

[Sue Ashforth]

BE AWARE!!! We've been Australian residents for almost 4 years now; last year one of us decided to claim our deferred UK State Pension (it was deferred for 20 months). As you may know, if you claim this in the UK, it is NOT able to push you into the next tax bracket and so you pay tax at the same rate as your other income (ie low earners pay 20% tax).

 

However, the tax implications in Australia are different - the one-off payment has pushed us into the next tax bracket so instead of paying only 19% as low income earners, we have to pay 32.5% (on income over $37000). Not only has this greatly increased our tax payment but the Medicare Levy is high too. We do understand that we have to pay tax and the Medicare Levy but I do wish we could have found a way to only pay the UK 20%! Perhaps we should have deferred our Dual Tax Agreement..................

[Bungo]

...

Edited August 6, 2015 by Bungo

[Sue Ashforth]

...

I don't know where you get that idea about UK tax from but I can assure you it is not true. In the UK your pension is treated as income from earnings and if pushes you into the next tax bracket when added with other incine then the tax brackets work in the usual way and you will pay more tax incrementally. So it works exactly the same way in Australia, although I would still defend Australia's right to do things different if it so wishes.

 

Hi Bungo, If you look at the UK tax website, it tells you "The rate of Income Tax to be used to charge any state pension lump sum is the highest (or marginal) rate that applies when charging the individual's other income to Income Tax. Section 7(5) confirms, firstly, that if the individual isn't liable to tax for the year of assessment on their other income, no tax should be deducted from any state pension lump sum. Otherwise, one of three rates of Income Tax apply, as follows...."

 

I would also defend Australia's right to have their own tax system; all I'm saying is I wish we'd known beforehand (our own fault, I know).