Money Box - Tax on lump sum withdrawals under new rules

Linton

EdSwippet wrote: »

From this article:

A clarification provided by HM Revenue and Customs to enquiries made by self-invested pension provider AJ Bell stated that emergency taxes do not need to be applied where a tax code is held for an individual and the provider’s systems can separately report the flexibly accessed element.

It states that if this is the case, providers would not need to apply a ‘month 1’ rate, which would multiply any payment and apply tax on the annual equivalent.

Different tax codes are specifically allocated to one's multiple pension (or wage) providers. In the case of a first lump sum payment would there be an applicable "tax code held for an individual"?

jem16

jamesd wrote: »

Just look back at mgdavid's post.

I did and this is what he says;

mgdavid wrote: »

for example in my case the larger DB pension uses the 1060 code, the other DB pension and the small annuity use BR, as does my SIPP provider on anything I withdraw under capped (this yr) or flexible DD (next yr).

You'll notice that his main tax code of 1060L is being used against his DB pension.

His other sources of income are using the BR tax code which is totally correct if his total income is below the higher rate tax threshold as he has informed HMRC. If his total income was going to exceed the basic rate threshold HMRC would have applied D0 to one of these income sources or amended the main tax code to take a deduction to collect extra tax.

This is the way the PAYE system works and is designed to work.

I know that HMRC gets a lot of criticism but I don't think that they are going to choose to deliberately issue a tax code that will result in a massive tax overcharge when they are given the opportunity in advance to avoid that.

For a first pension payment source, they have nothing at present to avoid that.

will HMRC given the information choose a massive tax overcharge or will they avoid it and try to get the correct tax. My experience is the latter - they have accepted my statements when I've asked them to do things because I think that it will minimise the error in tax take.

Have you had experience of a first pension payment James? My experience with 2 pensions shows that you cannot avoid the Month1 basis on the first payment.

jem16

Linton wrote: »

At the moment I believe jem16 is correct, there is no way for anyone to avoid paying excessive tax if taking an initial taxable lump sum now.

Unfortunately yes that is the case. Pension providers must use the Month1 basis even where there is a P45 involved. Where no P45 is involved they must use the Emergency Tax code on a Month1 basis - for next tax year this is 1060L.

There is a system in place so that those who have no other PAYE income or are only in receipt of the state pension and that is to use form P50. There are other scenarios where a refund could also be claimed before the end of the tax year.

Fully explained here;

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/405403/20150211_Newsletter_66_February_2015.pdf

But yes, one would be hopeful that HMRC will change their procedures pretty quickly. However there would need to be some new checks as people could be taking lump sums from multiple pensions in the same tax year.

The document I linked to was only published in December 2014 and seems to cover it. I can't see them changing that.

jamesd

The document you linked to is from December 2014. The story EdSwipped linked to contains the HMRC clarifications from 10 February 2015 which explain that what I described earlier is the way to go:

"A clarification provided by HM Revenue and Customs to enquiries made by self-invested pension provider AJ Bell stated that emergency taxes do not need to be applied where a tax code is held for an individual and the provider’s systems can separately report the flexibly accessed element.

It states that if this is the case, providers would not need to apply a ‘month 1’ rate, which would multiply any payment and apply tax on the annual equivalent.

...there will still be issues where providers do not hold an individual’s tax code, so advisers will need to ensure that tax codes are given to pension providers before any large withdrawals are made"

People should do one or more of the things that I suggested earlier, notably ensuring that HMRC has the information to issue a correct tax code to the pension provider before the first payment is made and that the provider has received that code.

I've no idea why you're choosing not to respect HMRC's clarification, but maybe you just didn't read it, hence my quoting it inline.

jem16

jamesd wrote: »

The document you linked to is from December 2014.

Yes and it is an official document written specifically for the new pension arrangements. Did you read it?

The story EdSwipped linked to contains the HMRC clarifications from 10 February 2015 which explain that what I described earlier is the way to go:

Well I am very surprised James. You are ignoring a government issued paper written specifically for the new pension arrangements with a very clear section on PAYE in favour of a media article which you think shares your opinion.

A clarification provided by HM Revenue and Customs to enquiries made by self-invested pension provider AJ Bell stated that emergency taxes do not need to be applied where a tax code is held for an individual and the provider’s systems can separately report the flexibly accessed element.

It states that if this is the case, providers would not need to apply a ‘month 1’ rate, which would multiply any payment and apply tax on the annual equivalent.

That simply clarifies that the tax code held by the pension provider would be used which is what I would expect. If it's a first payment, as we have been discussing, there will be no tax code held.

It's also a very simplified description of the Month1 tax basis as exactly the same thing would happen on a cumulative tax code if used in the first month of the tax year as will happen for a lot of people anxious to take advantage of the new rules.

Basically Month 1 tax codes only look at that month in isolation and taxes according to 1/12th of each tax band. It certainly does not simply multiply any payment and apply tax on the annual equivalent. Can you just imagine tax on £360k if just withdrawing £30k. :eek:

A cumulative tax code in the first month would see the exact same tax taken as the Month 1 tax code.

...there will still be issues where providers do not hold an individual’s tax code, so advisers will need to ensure that tax codes are given to pension providers before any large withdrawals are made

Again it clearly states that a tax code should be with the pension provider before a large withdrawal is made. No mention of the first payment.

People should do one or more of the things that I suggested earlier, notably ensuring that HMRC has the information to issue a correct tax code to the pension provider before the first payment is made and that the provider has received that code.

A correct tax code cannot be issued until after the pension provider has made the first payment using the emergency tax code. The document quite clearly states that and there is nothing in those clarifications that state otherwise.

Pension Flexibility: PAYE
Normal PAYE rules will apply to these payments. Where the fund is not extinguished with the first payment it will be treated as an ongoing PAYE source.

If a member has a P45 from a previous source/employment dated on or after 6 April in the current year, the scheme administrator should operate the code on the P45 on a Month 1 basis. HM Revenue & Customs (HMRC) will then issue a tax code to operate against future payments.

If a scheme administrator already makes payments to a member and has a tax code for those payments, the tax code should only be used for additional payments if the payments are being made at the same time. If more than one payment in a month is made and the same tax code is operated against each of those payments it could give the benefit of the tax allowances and rate bands twice.

In all other circumstances, including where individuals have a P45 from the previous tax year, the scheme administrator should use the Emergency Code on a Month 1 basis against the first payment and HMRC will issue a tax code to operate against future payments. The Emergency Code for the 2015 to 2016 tax year will be 1060L.

Scheme administrators who already operate a tax code against one payment stream under one PAYE reference, cannot use the same tax code against a second payment stream under a separate PAYE reference. Emergency Code on a Month 1 basis must be operated against the new payment stream until HMRC issues a tax code to operate against future payments.

Where the fund is extinguished the scheme administrator must issue a P45 which will enable the member to claim any tax refund that might be due in-year. Where a member decides to receive their money over more than one payment for example in five annual payments, the P45 should only be issued once the final payment is made.

jamesd wrote: »

I've no idea why you're choosing not to respect HMRC's clarification, but maybe you just didn't read it, hence my quoting it inline.

I have read the clarification and there is nothing in it that specifically mentions first payments being handled in the way you are advocating. Even a correct tax code will not necessarily stop extra tax being taken if it's early in the tax year. Again the official document outlines what should happen in those cases.

I have really no idea why you're choosing not to respect HMRC's official document, but maybe you just didn't read it.

For what it's worth this is what happened in January when my 2nd pension began and I contacted HMRC.

The new pension provider had already told me that they would use the emergency tax code until they received a tax code from HMRC. They said they wouldn't use my P45 and all tax queries should be via HMRC. As I knew the emergency tax code would not be correct and would see a tax underpayment, I contacted HMRC to see if they could issue a different tax code to the pension provider. Unfortunately HMRC could not issue a new tax code to the pension provider until the provider had made the first payment as that is what created the tax record under my name with all the relevant information such as PAYE reference etc. I had the PAYE reference of the provider but it didn't make any difference. I was advised to phone back once the first payment had been made which I did and a new tax code was then issued using all the relevant details. HMRC had the main details at that point anyway through RTI but the rest of the details from savings and investments was needed.

jamesd

What was linked to was a story describing a HMRC clarification, not just made up news. I read the document you linked to soon after it became available. Quoting from the document without including HMRC's subsequent clarification is unhelpful and likely to mislead others as it seem to have misled you.

I'm not so much interested in telling people the bad ways the system can work if you don't pay attention as in telling them how to work through the system to get desirable results. Hence my previous post, which will still do the job in spite of everything you have written yourself or quoted:

jamesd wrote: »

That's right but there are some ways around it:

1. Get a tax code to the pension provider before you take the lump sum.
2. Set up regular income instead of taking it all as a lump sum. Once the provider has the tax code you can take it as a lump sum.
3. If the lump sum is the whole amount of money in the pension pot there's a form you can use to reclaim the tax. If you don't take it all out you have to wait until you can file a tax return.

Getting HMRC to send the pension firm a tax code is probably the neatest way.

If you don't believe it, lets just wait and see what happens to people who do as suggested. If HMRC won't send a tax code until some payment has been made, 1 will work with a penny payment, I assume. I also assume that you don't disagree with 2 or 3?

What are your suggestions for how people can act to avoid the tax trap? After all, that's the point of this discussion and maybe you can come up with some way other than those that have been described so far.

jamesd

jem16 wrote: »

For what it's worth this is what happened in January when my 2nd pension began and I contacted HMRC.

The new pension provider had already told me that they would use the emergency tax code until they received a tax code from HMRC. They said they wouldn't use my P45 and all tax queries should be via HMRC. As I knew the emergency tax code would not be correct and would see a tax underpayment, I contacted HMRC to see if they could issue a different tax code to the pension provider. Unfortunately HMRC could not issue a new tax code to the pension provider until the provider had made the first payment as that is what created the tax record under my name with all the relevant information such as PAYE reference etc. I had the PAYE reference of the provider but it didn't make any difference. I was advised to phone back once the first payment had been made which I did and a new tax code was then issued using all the relevant details. HMRC had the main details at that point anyway through RTI but the rest of the details from savings and investments was needed.

Thanks for describing your experience. Maybe HMRC will still refuse to issue a code before a payment of a penny has been made but the methods in my post will still get the job done for a lump sum.

jem16

jamesd wrote: »

What was linked to was a story describing a HMRC clarification, not just made up news. I read the document you linked to soon after it became available. Quoting from the document without including HMRC's subsequent clarification is unhelpful and likely to mislead others as it seem to have misled you.

The clarifications have said nothing that the original document hasn't already said so no I haven't been misled.

What was likely to mislead, is your idea that HMRC will issue a tax code before a first payment by simply phoning them up.

If HMRC won't send a tax code until some payment has been made, 1 will work with a penny payment, I assume. I also assume that you don't disagree with 2 or 3?

All will work after the first payment - I'm glad you now agree on that fact.

However if early in the tax year, it will not stop a higher tax amount being taken if this is the only PAYE income.

What are your suggestions for how people can act to avoid the tax trap? After all, that's the point of this discussion and maybe you can come up with some way other than those that have been described so far.

If it's the only PAYE income, and early in the tax year, it can't be avoided and you will need to reclaim using the methods detailed in the document. Suggesting otherwise is misleading I'm afraid and will lead to people being disappointed or angry.

Best way to avoid any tax problems is not to take a lump sum in most cases.

Linton

jem16 wrote: »

......l



If it's the only PAYE income, and early in the tax year, it can't be avoided and you will need to reclaim using the methods detailed in the document. Suggesting otherwise is misleading I'm afraid and will lead to people being disappointed or angry.

Best way to avoid any tax problems is not to take a lump sum in most cases.

You will also suffer if it is late in the year - a "month 1" basis takes no account of the real month.

The only way I can see of avoiding the problem with HMRC's current procedures is to follow James' suggestion of putting through a small dummy payment to get the tax code right. That may attract extra charges depending on your provider.

coyrls

Linton wrote: »

You will also suffer if it is late in the year - a "month 1" basis takes no account of the real month.

I guess the only advantage of taking it late in the tax year is that it reduces the time to a tax refund via a tax return.