Tax, What a Palaver!

GSP

This financial year, I arranged to withdraw £13,750 from my post retirement taxable portion of my pension fund. This was my personal allowance and my wife's married tax allowance portion. I had been in touch recently with HMRC to check my tax code and they confirmed it was set up okay.
Yesterday, just over £9k was credited to my bank account. Just under £4.5k has gone to the tax office.
I just spoke to them as said I was confused and they say the system took my withdrawal to mean this as monthly income, as if I was earning £165k a year!
I have now been told to recover my tax I have to go through the process of completing a P55, and it could take at least six weeks to process.
Thought I had done everything I could beforehand checking my tax code was set up correctly with HMRC but I should have known better it would not be straightforward. I did tell them I was using my tax allowances in the first instances this financial year and would use my tax free portion in my pension fund when I need additional money.
Surely their system should have allowed for my tax allowance, then taxed me for anything from my taxable post retirement pot if I took any money out of here thereafter.
Hope this makes sense and Is there something I could and should have done differently?

BoGoF

A cumulative tax code in month 1 of the tax year will only give you 1/12th of your tax free allowance. Month 2 will give you 2/12ths....and so on. Basically you either drawdown what is covered by the tax free allowance when you draw it......or wait till end of tax year.

GSP

Thanks BoGoF.
So are you saying if I had arranged to receive £1,145.83 every month instead of the one lump sum from the pot would have been the better option not to have to go through this form filling process?
Thanks

BoGoF

GSP wrote: »

Thanks BoGoF.
So are you saying if I had arranged to receive £1,145.83 every month instead of the one lump sum from the pot would have been the better option not to have to go through this form filling process?
Thanks

Assuming you had no other income and your pension scheme allowed it then yes.

GSP

Thanks BoGoF.
Yes no other income. Will look to do this next financial year. I would prefer to receive monthly in truth. Better for planning etc. Fairly new to drawdown and seeing the lump sum being whittled away is not a good sight!

p00hsticks

GSP wrote: »

I did tell them I was using my tax allowances in the first instances this financial year and would use my tax free portion in my pension fund when I need additional money.

??? Not sure this is possible ? Either you take the 25% tax free lump sum as a single amount first, leaving everything else crystallised and taxable, or every bit you take consists of 2 elements - 25% tax free and 75% sunject to tax.

I don't believe you can leave the tax free element completely in the pension for another day - but I'm not an expert so stand to be corrected.

AnotherJoe

GSP wrote: »

Thanks BoGoF.
So are you saying if I had arranged to receive £1,145.83 every month instead of the one lump sum from the pot would have been the better option not to have to go through this form filling process?
Thanks

Yep and thats what i do.

[Deleted User]

I had the same issue with a lump sum withdrawal. Despite my best efforts in explaining the situation to my pension administrator the taxman got a big chunk of my money and I had to fill out the P55 to get it back. I recall that some committee of MPs has complained to HMRC about how they handle these issues. The way they do it is unnecessary, potentially confusing, and of course inefficient. Nonetheless, HMRC stated that they won't change anything. In their view the whole process is "straightforward" or words to that effect. I suppose such a response is only to be expected from the HMRC bottom feeders.

GSP

Johnsmith1890, I was quoted to use form P55, but that mentions death benefit on the front of it? Does it have multiple uses?
Thanks

Pension_Geek

johnsmith1890 wrote: »

I had the same issue with a lump sum withdrawal. Despite my best efforts in explaining the situation to my pension administrator the taxman got a big chunk of my money and I had to fill out the P55 to get it back. I recall that some committee of MPs has complained to HMRC about how they handle these issues. The way they do it is unnecessary, potentially confusing, and of course inefficient. Nonetheless, HMRC stated that they won't change anything. In their view the whole process is "straightforward" or words to that effect. I suppose such a response is only to be expected from the HMRC bottom feeders.

I suspect that HMRC would prefer to tax upfront rather than billing people months later when the tax year is over. There is no difference between drawdown and employed income in that respect, its just that its possible for people to draw their entire income in one go.

As much as you 'explained' your tax situation, the pension provider has to act in accordance with the rules.

[Deleted User]

GSP wrote: »

Johnsmith1890, I was quoted to use form P55, but that mentions death benefit on the front of it? Does it have multiple uses?
Thanks

No, it's only for claiming back overpayments on so-called 'flexibly-accessed pension payments'. I just looked again at the form online (2019-20 tax year) and there's no mention of death benefit on the front of it. However, on page 3 there's a kind of explanation as to how you should handle death benefit lump sum payments.


(I noticed also on Page 3 that HMRC are persisting with referring to tax payers as customers. I cannot think of a more arrogant attitude from a public service body than this. It beggars belief and just goes to show the contempt with which they treat their paymasters).