National Insurance in Early Retirement

Gatser

If someone semi retires at 55 and earns £25k from employment
plus £15k from pension drawdown, is the pension income subjected to National Insurance or only Tax?

jamesd

Pension income is never subject to NI at any age and regardless of the type of pension. Whether a person is working or not makes no difference to this, nor does whether they are over or under state pension age.

Pension income is paid via PAYE, just without the NI deduction, except for the state pensions. This is so for both annuity and drawdown.

If your work uses salary sacrifice you can do very well on the tax relief front by taking as much from the pension as the GAD limit allows and using basic rate salary sacrifice in the work to avoid higher rate tax relief. You end up getting basic rate salary sacrifice - the bigger employee NI saving - as well as the usual 25% tax free lump sum gain on the recycled income. The 25 % is a good deal made even better by the extra free NI gain.

Gatser

thank you James
when a sipp provider pays over drawdown , do they pay it gross and leave it for the individual to declare/pay tax?
if PAYE is applied I assume that one can then split the tax code between sipp providers?

jamesd

It's done with standard notices of coding to the pension provider, though I don't know in detail how it's done. Given that you have a paid job I expect that all of your personal allowance will be used for that one and any pensions will be set to BR for basic rate income tax deduction on the whole amount.

When you're no longer in paid employment HMRC would do something sensible with the personal allowance. If enough is paid in one pension to use it all I assume that they would select that one to get the normal tax code and use BR for the rest. Once the state pensions start that tax code would then need to be adjusted so that you pay enough income tax to cover the state pension's tax liability. Which is likely to use up most of your personal allowance, eliminating most of it in whichever pension is being used with the allowance. So:

State pensions: paid without tax deduction.
Big pension: notice of coding to set tax code to ((9440 - state pension) L) / 10 . So 200L if state pensions is £7440 a year.
Other pensions: notice of coding for BR.

Don't know how HMRC handles it if there's no one pension big enough, I assume have to split the allowance between pensions or use a K code for one of them.