Paying £2880 into pension when retired

Xbigman

Thank you for taking the time to post. 
I took (started to receive) my DB pension 2 years ago which I understand restricts my pension options considerably. I might be wrong. It's easy to read huge amounts of posts on this board that explain everything in great detail, yet still get totally the wrong idea about some things.

Darren

OldBeanz

Xbigman said:

Thank you for taking the time to post. 
I took (started to receive) my DB pension 2 years ago which I understand restricts my pension options considerably. I might be wrong. It's easy to read huge amounts of posts on this board that explain everything in great detail, yet still get totally the wrong idea about some things.

Darren

It has no affect on any other pension.

akh43

I am 61, retired in 2019 and decided to do this for the first time in September last year paid in the money to a HL SIPP and received the Government addition in November and contacted HL to withdraw £3,500 and leave £100 to keep the SIPP open which happened in December.  I was under the impression 25% of the £3,500 was tax-free and I would pay tax on the rest of the money, was I wrong to think this?

I received £3,183.60 into my bank account and assumed the £316.40 difference was the tax due as I am a basic rate tax payer as my pension income is over £13,225.80 and I usually pay £12 a month in tax.

I have today received a letter from HMRC saying my tax code for 6 April 20-5 April 21 has been reassessed less an adjustment for tax I owe (this year, letter dated 27 December 20) of £3,383.  My tax code has now been changed to 911L X which replaces 1250L and they estimate I owe £208.60 (this year, which I assume is 2020)

In note 5 on the back of the letter is says:

"Due to an adjustment in your tax code(s) we think that you will owe HMRC £208.60. We are unable to collect the amount in full this year based on your current income. We have allowance by £3383.00 so we can collect £183.57 in equal instalments from now on by increasing the tax decuded from your wage, salary or pension so that the £183.57 is paid by 5 April 2021.  We will collect the remaining amount of £25.03 in equal instalments by including an adjustment to reduce your tax-free allowance by increasing the tax deducted fromyour wages, salary or pension from 6 April 2021. "

There is a letter on my HL account which says:

"Please note that HMRC have instructed us to apply the above tax code on a 'Month 1' (M1) basis. When applying a tax code on a 'Month 1' basis to a payment, any previous pay and tax in that tax year is ignored and only one month's of allowances are applied, as such the net income payment you receive may be higher or lower than expected.The tax code shown above is subject to change. We may not have time to inform you of an updated tax code prior to making a payment. Income tax will be deducted in accordance with the tax code we have recorded at the time of your payment.One-off or large income payments could potentially be taxed disproportionately which could result in more tax being paid than is owed. You will normally need to reclaim any overpayment of tax directly from HMRC. You do not need to wait until the end of the tax year to do this" 

The tax code in the HL letter says BR M1, which is different to the HMRC letter.

I am totally confused what has happened, I expected to pay tax on the HL money and thought if anything they would take too much, but that I had paid all the tax due, but the HMRC letter has just confused me and don't understand why I now owe money.  Do I just wait and see if it sorts itself out or do I need to contact HMRC?

Any comments appreciated.

Thanks

AlanP_2

On £3500 withdrawn the overall tax looks about right to me.

25% TFLS = £875

Taxable = £2625, so at 20% = £525
 
HL took £316.40 and HMRC say you owe £206.60 which = £523 (you go on to say £183.57 in 20/21 tax year and £25.03 in 21/22 which = £208.60 so I suspect your £206.60 is a typo).

JGB1955

akh43 said:

I am 61, retired in 2019 and decided to do this for the first time in September last year paid in the money to a HL SIPP and received the Government addition in November and contacted HL to withdraw £3,500 and leave £100 to keep the SIPP open which happened in December.  I was under the impression 25% of the £3,500 was tax-free and I would pay tax on the rest of the money, was I wrong to think this?

I received £3,183.60 into my bank account and assumed the £316.40 difference was the tax due as I am a basic rate tax payer as my pension income is over £13,225.80 and I usually pay £12 a month in tax.

I have today received a letter from HMRC saying my tax code for 6 April 20-5 April 21 has been reassessed less an adjustment for tax I owe (this year, letter dated 27 December 20) of £3,383.  My tax code has now been changed to 911L X which replaces 1250L and they estimate I owe £206.60 (this year, which I assume is 2020)

In note 5 on the back of the letter is says:

"Due to an adjustment in your tax code(s) we think that you will owe HMRC £208.60. We are unable to collect the amount in full this year based on your current income. We have allowance by £3383.00 so we can collect £183.57 in equal instalments from now on by increasing the tax decuded from your wage, salary or pension so that the £183.57 is paid by 5 April 2021.  We will collect the remaining amount of £25.03 in equal instalments by including an adjustment to reduce your tax-free allowance by increasing the tax deducted fromyour wages, salary or pension from 6 April 2021. "

There is a letter on my HL account which says:

"Please note that HMRC have instructed us to apply the above tax code on a 'Month 1' (M1) basis. When applying a tax code on a 'Month 1' basis to a payment, any previous pay and tax in that tax year is ignored and only one month's of allowances are applied, as such the net income payment you receive may be higher or lower than expected.The tax code shown above is subject to change. We may not have time to inform you of an updated tax code prior to making a payment. Income tax will be deducted in accordance with the tax code we have recorded at the time of your payment.One-off or large income payments could potentially be taxed disproportionately which could result in more tax being paid than is owed. You will normally need to reclaim any overpayment of tax directly from HMRC. You do not need to wait until the end of the tax year to do this" 

The tax code in the HL letter says BR M1, which is different to the HMRC letter.

I am totally confused what has happened, I expected to pay tax on the HL money and thought if anything they would take too much, but that I had paid all the tax due, but the HMRC letter has just confused me and don't understand why I now owe money.  Do I just wait and see if it sorts itself out or do I need to contact HMRC?

Any comments appreciated.

Thanks

You withdrew £3,500.  25% (£875) was tax free.  The remaining £2625 was taxable at 20% because you had exceeded your personal allowance.  £2625 @ 20% = £525 tax due.  You should have received £3500 - £525 (£2975) but received £3183.60.  the difference of £208.60 is what you now owe HMRC.

akh43

Thanks for the responses.  Is it usual that HL would take so much less tax than they should have?  When I got a lump sum when I retired it was the opposite and I paid too much tax and got tax back for months afterwards, this time its the opposite.  At least I will know what to expect next year if I decide to do it again.

Dazed_and_C0nfused

akh43 said:

Thanks for the responses.  Is it usual that HL would take so much less tax than they should have?  When I got a lump sum when I retired it was the opposite and I paid too much tax and got tax back for months afterwards, this time its the opposite.  At least I will know what to expect next year if I decide to do it again.

Yes it is usual, and in fact what HL are supposed to do.

They are meant to use the emergency tax code on a non cumulative basis.

That means you will have received 1/12th of your Personal Allowance via HL when none is actually due.

£12,500 / 12 = £1041

£1041 x 20% = £208

From now on HL should deduct 20% from any further payments.  So you would only owe extra if you were actually due to pay 21/40/41/45/46% tax on the HL pension.

Dazed_and_C0nfused

The tax code in the HL letter says BR M1, which is different to the HMRC letter.

You should now have two tax codes, one for your main in one source and one (BR) for HL.

Is this not what HMRC have told you??

akh43

Dazed_and_C0nfused said:

akh43 said:

Thanks for the responses.  Is it usual that HL would take so much less tax than they should have?  When I got a lump sum when I retired it was the opposite and I paid too much tax and got tax back for months afterwards, this time its the opposite.  At least I will know what to expect next year if I decide to do it again.

Yes it is usual, and in fact what HL are supposed to do.
They are meant to use the emergency tax code on a non cumulative basis.
That means you will have received 1/12th of your Personal Allowance via HL when none is actually due.
£12,500 / 12 = £1041
£1041 x 20% = £208
From now on HL should deduct 20% from any further payments.  So you would only owe extra if you were actually due to pay 21/40/41/45/46% tax on the HL pension.

I had just assumed HL would take 20% tax (or more going off my previous lump sum) from the amount left after the tax-free amount so clearly I was wrong.  I thought it would be simple process from previous posts, but it seems far from it to me. 

I assume if I did decide to do this again it would be more straightforward?

Dazed_and_C0nfused said:

The tax code in the HL letter says BR M1, which is different to the HMRC letter.

You should now have two tax codes, one for your main in one source and one (BR) for HL.

Is this not what HMRC have told you??

On the HMRC letter is says for my works pension amended tax code of 9111L X and for HL says £0 of this income is tax-free and a tax code of BR X.

Dazed_and_C0nfused

You previously said, 

The tax code in the HL letter says BR M1, which is different to the HMRC letter.

So presumably you now agree that the HMRC letter and HL now match each other?

The emergency tax code is standard for the first ever payment from a pension.

Once they receive notification of the new pension HMRC will review your code and issue the correct code to each employer/pension payer.  Which is what seems to have happened here.

So if you take another £2,625 next tax year then HL should deduct £525 tax.