Money Box - Tax on lump sum withdrawals under new rules

jem16

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 wasn't referring to the Month 1 tax code. I was referring to a proper cumulative tax code which James expects to see issued.

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.

It may do of course.

However even a proper cumulative tax code may not help early in the tax year where the only PAYE income is the lump sum. If it's a 2nd source of income and can utilise a BR or D0 tax code it will help.

mgdavid

jem16 wrote: »

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

They *can*, the discussion seems to be whether they will, or should.
In my case they did.
I have already said that (a) it was late-ish in the year and (b) I have other sources of PAYE income, 3 other tax refs in fact.
BR was issued and used; obviously I have no way of knowing if this was a one-off concession or even a mistake.

I don't think we should get too worked up over this; the situation is new to everybody and there's bound to be unintended consequences and wrinkles to be ironed out over the coming months.

jem16

mgdavid wrote: »

They *can*, the discussion seems to be whether they will, or should.
In my case they did.

Thanks - very interesting if that was the case.

I have already said that (a) it was late-ish in the year and (b) I have other sources of PAYE income, 3 other tax refs in fact.
BR was issued and used; obviously I have no way of knowing if this was a one-off concession or even a mistake.

So the SIPP provider had never made a payment to you before and held no tax code on their records for you?

If that's the case I wonder how HMRC knew what PAYE ref would have been used for you and therefore where to send the code to?

I don't think we should get too worked up over this; the situation is new to everybody and there's bound to be unintended consequences and wrinkles to be ironed out over the coming months.

I think what we need to understand is that these payments are going to be handled under the present PAYE system and that we have to work with its limitations.

mgdavid

jem16 wrote: »

....
So the SIPP provider had never made a payment to you before and held no tax code on their records for you?

If that's the case I wonder how HMRC knew what PAYE ref would have been used for you and therefore where to send the code to?
.....

The SIPP provider had previously made more than one PCLS payment to me but as these are tax-free I don't know if this would have required them to have dialogue with HMRC about me.

Before executing the end-of-tax-year DD request I phoned HMRC, explained what I was doing and how the DD amount would be within the 20% band, provided all details asked for, and they issued a BR code.
HTH.

jem16

mgdavid wrote: »

The SIPP provider had previously made more than one PCLS payment to me but as these are tax-free I don't know if this would have required them to have dialogue with HMRC about me.

It would have opened a tax record (and therefore reference) with that provider to allow the PCLS to be paid. The fact that no taxable income was paid was immaterial as it was assumed that at some point you would draw taxable income.

So yes that was the reason you were able to phone up HMRC and a BR tax code was issued as they already had that pension provider on your record.

This may be a possible workaround for getting a tax code which may be more specific if you have more than once source of income and a BR/D0 tax code could be used.

mgdavid

jem what proportion of people entering drawdown will have already taken a PCLS do you reckon? I would have thought maybe more than 75%, perhaps closer to 100%?

jamesd

jem16 wrote: »

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

I agree that they declined for you but I can hope that they will have changed their procedures for the new system and if not, that we can describe the various ways to get a tax code to the pension provider before a taxable lump sum is paid. My hope may be forlorn but I try to be optimistic while describing the pessimistic alternatives.

Do you or anyone else see any problems with this description of the various ways to get a taxable lump sum without it being treated as the first of regular monthly payments and taxed excessively?

1. If you are going to take out all of the money in the pension pot, don't worry about it, just do that. Then use Reclaim Form P50 if you have no other pension/PAYE income or Reclaim Form P53 otherwise to reclaim the extra tax from HMRC during the tax year.

2. Take a tax free lump sum of any amount, wait a week or so and ask HMRC to issue your pension provider with a tax code based on your expected situation for the whole tax year. Once the provider has the tax code, take any desired further tax free or taxable lump sums. You will probably want to take a 25% tax free lump sum so this is probably the most convenient way to go provided your pension provider lets you wait a while between taking the tax free lump sum and saying what you want to do with the rest. The law allows many months (6?) of delay but they might not.

3. If no tax free lump sum available because you've already crystallised, use the same approach as 2 but with a small taxable lump sum instead.

4. Call HMRC and ask them if they can issue a tax code based on your whole projected income for the year. If they continue to decline as they have in the past, move on to the next steps.

5. Find out whether your pension provider is able to report taxable lump sums separately from regular income. If they can, take any low value taxable income payment, wait a week or so and then ask HMRC to issue a tax code based on your anticipated annual income. Once the provider has the tax code, take the main taxable lump sum.

6. As 5 but set up a regular payment of a low value instead of a small lump sum. It may be cheaper, just depends on how your pension provider charges.

7. For any of the cases 4, 5, or 6 wait until your pension provider has received the tax code from HMRC then take the taxable lump sum.

8. If your pension provider can't report the income and taxable lump sum separately, use a regular monthly income instead. You can reduce the extra tax taken on the first payment by starting with a low initial amount and increasing it later. Call HMRC after the first payment to get them to calculate the right tax code based on your planned annual income.

Most of the above assumes that you'll use flexi-access drawdown. If you want to use the uncrystallised funds pension lump sum route instead, either take all of the money from the pot and reclaim the tax or take one small lump sum, get the tax code updated, then take the larger amount(s).

jamesd

mgdavid wrote: »

They *can*, the discussion seems to be whether they will, or should.

"NONE" is a permitted reference for a person not yet in receipt of a pension, or only in receipt of the state pensions. I assume that a pension provider could just tell you what their reference is. But maybe there is some other reference in addition to this that HMRC would want, if only an existing pre-completed record in their system that a payment of some sort would create:

"If you have just started employment, or are receiving a pension for the first time and you do not yet know this reference, you should contact your employer or pension provider.

This reference will be in the format xxx/xxxx. The first three digits before the forward slash tell HMRC which tax office deals with your PAYE tax and National Insurance. The numbers after the forward slash tells HMRC about your employer or pension provider. Please enter the full number including the forward slash. Please enter the reference without spaces.

This number can be found on your form P60, which your employer or pension provider will supply at the end of each tax year showing your earnings for that year. It may also be found on your payment slip and is also known as your tax reference.

If you are unable to obtain this reference you may enter NONE. However, it is important that you do not enter NONE where you are, or have been, employed, or in receipt of a pension, as this might result in your form being rejected and your personal details remaining unchanged."

Whether HMRC can or would choose to use this for a person calling them before a first payment is up to HMRC but the capability appears to be there to obtain the reference in advance or use a NONE reference instead.

I've no real idea why they didn't do this for jem16 but maybe they just decided that it was a regular payment so the tax difference would be corrected soon enough anyway.

jem16

mgdavid wrote: »

jem what proportion of people entering drawdown will have already taken a PCLS do you reckon? I would have thought maybe more than 75%, perhaps closer to 100%?

It's a difficult one to guess at. May well be as high as you suggest. Going forward though a lot of people seem to just want the whole pot regardless.

jem16

jamesd wrote: »

I agree that they declined for you but I can hope that they will have changed their procedures for the new system

It doesn't look like they are going to do that though as HMRC has been quite clear in saying that the new pension arrangements will be taxed under normal PAYE arrangements.

and if not, that we can describe the various ways to get a tax code to the pension provider before a taxable lump sum is paid. My hope may be forlorn but I try to be optimistic while describing the pessimistic alternatives.

Being optimistic is good but it's also sensible to be realistic.

Do you or anyone else see any problems with this description of the various ways to get a taxable lump sum without it being treated as the first of regular monthly payments and taxed excessively?

That's the difficulty James as the PAYE system is designed to do exactly that. With a normal cumulative tax code used early in the tax year you are going to pay excessive tax with any large lump sum. People who receive yearly bonuses have always had this problem.

If you want to avoid that then take it in the last month of the tax year with a cumulative tax code.

2. Take a tax free lump sum of any amount, wait a week or so and ask HMRC to issue your pension provider with a tax code based on your expected situation for the whole tax year. Once the provider has the tax code, take any desired further tax free or taxable lump sums. You will probably want to take a 25% tax free lump sum so this is probably the most convenient way to go provided your pension provider lets you wait a while between taking the tax free lump sum and saying what you want to do with the rest. The law allows many months (6?) of delay but they might not.

If you have other income streams and your main tax code is already utilised, then this would be fine as you'll be allocated a BR or D0 tax code. This would be normal procedure anyway.

If you have no other PAYE income, you will be given a normal cumulative tax code based on your personal allowance and any deductions that apply. Giving your total income for the year will give an accurate tax code especially if it takes you over £100k where you start to lose your personal allowance.

However this tax code will still not prevent an overpayment of tax if the lump sum is paid early in the tax year as you appear to be suggesting.

The last paragraph is the most important part to understand for anyone with just that one income stream other than the state pension.

or take one small lump sum, get the tax code updated, then take the larger amount(s).

This will still not stop an overpayment of tax for those with one income stream if early in the tax year as I have said.