tax treatment of UFPLS

squirrelpie

I made a UFPLS withdrawal from my SIPP just before the end of the tax year. It's the first withdrawal I've made and I'm having trouble understanding the information I have so far received, so I'd appreciate any explanations or pointers to explanations!

I withdrew £6666 gross. I expected that would give me £1666.50 tax free and £4999.50 taxable. I expected the taxable to be taxed at 20% thus tax of £999.90 and payment to me of £3999.60, giving me a net total payment of £5666.10. My taxable income was very low last year so I expect I will be able to claim the tax back later.

But the provider has paid me £5608.34 and say they paid the taxman £1057.66. I don't understand how those sums were calculated. Can anybody enlighten me? (Yes, I will ask them, but I'd prefer to understand the situation first).

By coincidence (?) I've also just received my new tax codes for this coming tax year. It includes a tax code for the SIPP provider. I don't understand why? I just made a one-off withdrawal; what assumptions has the taxman made? And do I need to change their minds somehow?

Dox

Always worth asking the provider first in case the simple answer is 'mistake' !

The taxman has no idea whether you will be drawing cash from your SIPP again any time soon - hence the provision of a tax code to the SIPP provider (as HMRC would for any pension scheme paying benefits).

Brynsam

Could be an error, so why not ask the SIPP provider now?

jcorbygas

We had this last week with a one off withdrawal. What it appears to be is that HMRC think that you are going to withdraw that amount each month so they tax you accordingly on the withdrawn amount x 12.
So in your case it looks like they took off the 25% tax free, then the remainder x 12 is taxed at the 20% or 40% of the whole x 12 amount. If you go on to https://www.listentotaxman.com you can see that the amount you received works out like I said.
There is an online form you can use with HMRC to get back tax that has been overpaid - I think its form P55

Hope the above makes sense!

Linton

Pension payouts are taxed under PAYE. PAYE assumes that your income is spread evenly over the year amd therefore allocates 1/12 of your allowances and tax band limits to each month. Large one off payments can therefore attract a high rate of tax.

Unused allowances/tax bands are accumulated each month so if you dont want to suffer a temporary high rate of tax you should make your one-off drawdown late in the tax year.

However this doesnt work for the first time ever you receive a taxable payment as HMRC wont have issued a tax code. Under those circumstances you are usually taxed on an emergency code with a month-1 basis - ie with no month to month carry forward of allowances. After they find out that you have been paid by a new "employer" HMRC will issue a tax code.

squirrelpie

Thanks for the replies chaps.

So in your case it looks like they took off the 25% tax free, then the remainder x 12 is taxed at the 20% or 40% of the whole x 12 amount. If you go on to www.listentotaxman.com you can see that the amount you received works out like I said.

Ah, OK I get a number very close to what happened, so I think you're right.

That seems brain dead though. Even if I was going to take further similar payments every month, all other payments would be in the next tax year! I can't see how it makes any possible sense to assume that I have been making payments which haven't actually happened? Is our tax system really that broken?

There is an online form you can use with HMRC to get back tax that has been overpaid - I think its form P55

Do I need to fill that out? I know I do if I take a payment earlier in the tax year and want to reclaim the tax straight away, but does the system not correct itself if I just wait until the end of the tax year (which has already passed) when HMRC add everything up and correct my tax bill?

Linton

squirrelpie wrote: »

Thanks for the replies chaps.

Ah, OK I get a number very close to what happened, so I think you're right.

That seems brain dead though. Even if I was going to take further similar payments every month, all other payments would be in the next tax year! I can't see how it makes any possible sense to assume that I have been making payments which haven't actually happened? Is our tax system really that broken?

Do I need to fill that out? I know I do if I take a payment earlier in the tax year and want to reclaim the tax straight away, but does the system not correct itself if I just wait until the end of the tax year (which has already passed) when HMRC add everything up and correct my tax bill?

The PAYE system is designed to run automatically with minimal admin both for HMRC and "employers" on the assumption that people are paid a fairly constant amount each month - eg for earnings, DB pensions and annuities. It works very well for that. One-off drawdown lump sums are a relatively new feature, at least as a mainstream feature. HMRC could either get a completely new system designed and implemented across all drawdown providers or make do with the system already in place. They, sensibly in my view, chose to do the latter.

The system would correct itself at your next payment in the current tax year but since you havent got one, it wont. HMRC will sort everything out at the end of the tax year.

NorthernGeezer_2

The general feeling here is that your 1st withdrawal should be a small one so HMRC dont hammer you.

Dazed_and_confused

The tax deducted (after allowing for the emergency tax code allowances) is,

£2791.66 x 20% = £558.33
£1248.34 x 40% = £499.33

Total tax deducted £1057.66

squirrelpie

They, sensibly in my view, chose to do the latter.

I quite understand that point. IMHO, though, the system wasn't designed sensibly for the continuous case either, although it would probably sort the mistake out faster in that case.

The system would correct itself at your next payment in the current tax year but since you havent got one, it wont. HMRC will sort everything out at the end of the tax year.

Just to be clear, do you mean the end of the 2017/18 tax year or the 2018/19 tax year?

The general feeling here is that your 1st withdrawal should be a small one so HMRC dont hammer you.

Agreed, but there wasn't time for that. My fault for not planning far enough ahead, I know.

£2791.66 x 20% = £558.33
£1248.34 x 40% = £499.33

Total tax deducted £1057.66

The total is correct, but where do the £2791.66 and especially the £1248.34, come from?

molerat

squirrelpie wrote: »

The total is correct, but where do the £2791.66 and especially the £1248.34, come from?

They have used 1150M1 tax code so £959.09 would be free of tax and the rest taxable as stated (although the tax calculation tables make the allocation of those figures slightly different but the same total tax). £4999.50 subject to tax. £959.09 tax free allowance leaving £4040 taxable. £2792 at 20% = £558.46 and £1248 at 40% = £499.20 = £1057.66 total tax deducted.