child tax credit income definition

my client gets CTC with disabled child element, he want to cash in his occ pension and take about £60.000 out
will the capital affect the amount of CTC he gets, I can see the 25% tax free part is disregarded but CPAG page 1421 says any other amounts are taken into account, but not clear if that’s as income or capital !!!

It says “If you can take a lump sum from a pension because you are aged 55 or over, the tax-free amount is ignored, but other payments count as income.

yes I am not sure if other payments mean the 75% cash that’s not tax free or if it means payments of a monthly pension for example

It means any other payment from the pension pot, whether regular or one-off is treated as income,

Thanks Paul, that’s what I feared so CTC would be affected by the lump sum he takes from his pension then as it is treated as income !!!!!

It’s because it’s following tax rules.  While for MTBs there is a difference between lump sum capital withdrawal and regular withdrawals, which are treated as income, that’s not the HMRC way.  Pensions, tax free amount excepted, are treated as being taxable income in the tax year in which they are taken. Your client will also find that they will probably have, at least some of, the £60k taxed at the higher rate.  From that perspective they’d be better taking it over at least two tax years..

Gareth many thanks, yes we are restricted to what we can advise obviously as its verging on financial advice which we can’t give, I do benefits so its my unfortunate duty to explain the fallout from him taking this action, shame as he will lose IR esa and CTC for ever once he has lost them I fear and if the notional income rules apply once he has spent it all he could be off benefits for a very long time indeed

You’re completely correct that we can’t give financial advice and are well advised to steer clear of being seen to do so.

However, you can send him to Pension Wise to understand his options here and in particular, the fact that he doesn’t have to draw down the entire pension pot in one go.

He could, for example, seek to take out one quarter of the overall pot or £15,000 say, 25% of that would be tax free (£3,750) but rest would be taxed at 20% (£11,250 less 20% equals £9,000) so he’d receive ££12,750 (assuming he’s not a high rate tax payer) which might wipe out the CTC award on income grounds but doesn’t automatically terminate ESA-IR award due to capital exceeding the £16k threshold (although you would need to do tariff income of course which i make as £27 p/w).

The remaining £45,000 can stay in the pension pot until he next wants to draw down any money and won’t affect working-age benefits whilst he is under State Pension age.

Hi Paul, he has had pension wise advice , as much as they give anyway, he is adamant he wants the whole lot we have warned him of the effect on his benefits but in this case I suspect he will do what he wants anyway
Thanks for the info on the options though, may be useful for other clients

Paul_Treloar_AgeUK - 27 July 2023 03:10 PM

He could, for example, seek to take out one quarter of the overall pot or £15,000 say, 25% of that would be tax free (£3,750) but rest would be taxed…..

It depends how he chooses to do it. He could take out 25% all tax free, leaving the rest to be wholly taxable when withdrawn, or drawdown with 25% of each sum being tax free.

well we will stay clear of anything that touches on financials , luckily i just have to advise him on his benefits which will l b enough for him to worry about once he has the £60.000 in his hands,  I don’t fancy fighting a case about deprivation of assets on this one

Well he won’t get anywhere near £60k in his hands and he may end up with emergency tax being applied, if his pension company don’t have his tax details.  Assuming standard tax allowances, our emergency tax reckoner gives

Tax amount at each band Month 1 tax applicable
  20.00% £628.33
  40.00% £2,914.67
  45.00% £15,085.88
  Month 1 tax amount total £18,628.88

  Initial sum received including tax free amount is £41,371.13

He’ll get a chunk of that back in due course but it can be a hassle.

Thanks Gareth, that might give him pause for thought about his plans, it might be wiser for him to stay on ir/esa pip, CTR and save his pension for a real rainy day but of course the choice is his we can just provide the options
Thanks everyone for contributions to this one

Hi Diogenes

Just to add, CTC entitlement might not be lost forever - he might be able to hang onto a nil award in 2023/24 (but could have an overpayment for amount of CTC already received in this financial year if annual income too high to qualify) then start to receive payments again in 2024/25, based on estimate of that year’s income. Then under managed migration, he should benefit from the transitional capital disregard for 12 assessment periods. Nil tax credits awards are not intended to be part of managed migration but there may be change to allow them to be terminated without the claimant’s consent.

Edit: Sorry, there shouldn’t be an overpayment of CTC for period on income-related ESA.

Mark