Reclaiming Tax in Drawdown

drumtochty

[FONT=&quot]Sorry about this, virtually everyone is not answering the question.[/FONT]
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[FONT=&quot]Tax year 2011 2012 until now we are running a limited company and in most years paid ourselves around £7000 to £8,000 a year.[/FONT]
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[FONT=&quot]My good lady had her full tax code allocated to the limited company.[/FONT]
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[FONT=&quot]2018 2019 we had no income from the limited company as planned but the £11,850 PA for the good lady was allocated to the limited company employment.[/FONT]
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[FONT=&quot]After 6th April 2018 she withdrew a taxable lump sum of £9,400 from her SIPP and £1,000 from the taxable portion of a small pot occupational money purchase pension that closed that small pot pension.[/FONT]
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[FONT=&quot]The result was a large amount of tax on the pensions. The tax rebate form was filled in and within a month the tax rebate was in our bank account, thank you very much HMRC.[/FONT]
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[FONT=&quot]In March 2019 a £120 a month Council pension started to be paid to her, no tax code was allocated to this pension, therefore she was taxed on it.[/FONT]
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[FONT=&quot]This was sorted in April for last year when we did her tax return.[/FONT]
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[FONT=&quot]In late May 2019 HMRC allocated for the 2019 2020 tax year £9,400 of her tax code to the SIPP therefore they were expecting last year’s withdrawal to be similar each year, £1440 of her tax code was allocated to the Council pension and the remainder of the tax code to our limited company.[/FONT]
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[FONT=&quot]She withdrew £3,400 in September 2019 from her SIPP in order not to have to get into paying and applying for a tax rebate.[/FONT]
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[FONT=&quot]She got her £120 a month from the council pension taxed starting mid-April at the zero tax code but sorted in the June payment as the tax code was then properly allocated.[/FONT]
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[FONT=&quot]In August 2019 she started receiving her state pension.[/FONT]
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[FONT=&quot]Her council pension is now taxed at BR to claim back tax on her state pension. Therefore, a tax deduction in September.[/FONT]
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[FONT=&quot]Her SIPP tax code is still £9,400 but we will only withdraw the £3,400 to keep her from paying tax.[/FONT]
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[FONT=&quot]The tax code allocated to our limited company is a K code and that adds something like £5,500, not the correct number to what she is paid or in this case is not paid!!!!!!!!! In order to claim back tax on her state pension.
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[FONT=&quot]We will have to phone HMRC ask them and reduce her tax code on her SIPP, increase the tax code allocated to her Council Pension back to £1,440. [/FONT]
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[FONT=&quot]At best you can phone HMRC at the start of February each year and try to get them to sort out your tax codes for the next year as they will not know what amounts you will withdraw from your SIPPs in April of the next tax year.
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[FONT=&quot]Even then you will still have to fill in a tax refund application at the end of April to sort out your tax rebate if you do an annual pension payment in a lump sum.[/FONT]
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[FONT=&quot] Then when your State Pension starts it has to be sorted again.
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[FONT=&quot]About as clear as mud I would say.[/FONT]

Audaxer

AnotherJoe wrote: »

Will it make any difference if the investments are the same?
eg say SS is invested in Acme in the SIPP, takes out 1/12 each month and reinvests in Acme in an ISA.
For many investments there wont be any additional costs, especially funds.
For some, mostly shares, there will be transaction charges though even those would be much lower if it were a regular investment they set up.

So it would depend what the investments were.

AnotherJoe, I know you are an experienced investor so maybe Sea Shell and I are missing something here. Surely drawing down up to your Personal Tax allowance each year where possible, just to effectively move investments from a SIPP to an S&S ISA, has the advantage that when you need to withdraw the cash to spend, you can take it out of the S&S ISA tax free? If she leave the investments in the SIPP to grow until she needs to withdraw more than the Personal Allowance as income, then she will have to pay tax on that as far as I am aware?

Reluctantpensioner

Some of the answers are pretty optimistic about what happens.
My experience: you draw down X of taxable money out. They have no interest in your tax code, or seeing a P45 etc.
They multiply X by twelve as if it were monthly all year and tax you on that. Even if the withdrawal is in the last days of the tax year!
If X is sizable (say, just under the High Rate band), you will then be assessed for hundreds of thousands and pushed into 45% tax bracket, with all the negative consequences. You will get less than half your money.
You can reclain with a P55, and online its pretty quick (took me ten days from apply to cheque), But I think this will only work at the end of the tax year as they want you to say: "I won't withdraw more, finalise the year"

Sea_Shell

But if you KNOW you're not going to draw anymore, can you do the P55 form almost immediately, as soon as you've been paid? and then do the same in subsequent years.?

jamesd

Sea_Shell wrote: »

But if you KNOW you're not going to draw anymore, can you do the P55 form almost immediately, as soon as you've been paid? and then do the same in subsequent years.?

From one of my drawdown posts:

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To reclaim overpaid pension tax you can use one of these forms:

• Flexible access. Which is UFPLS or taking money from a drawdown pot you've already taken the tax free lump sum for. Not for taking a tax free lump sum (no need to tell HMRC) or using the small pot rule (see below):
  • P55 when you've flexibly accessed part of your pension pot and aren't taking ongoing income from the pot
  • P50Z if you've emptied your pension pot and are neither working nor receiving taxable benefits (the state pension and carer's allowance are taxable benefits)
• P53 or P53Z if you've emptied your pot using the small pot rule or trivial commutation. The print, fill in and post P53 version has a box where you can say which tax year it's for. "If you’ve only used part of your pension pot, or if you’re not working or receiving benefits, you’ll need to use form P55 or form P50Z"

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So P55 if not (yet...) taking ongoing income or P50Z may apply instead, since you're emptying the crystallised pot. And you can do whatever applies in subsequent years.

A place like HL has no charge for changing things so you could set up low monthly payments to maintain a tax code and add a lump once a year. The relief wouldn't be as rapid that way, though.

Sea_Shell

*** Edited to add ***
If only claiming small pot pensions, in full, in any tax year, does the same principal apply. Say, you've got a small pot of £8000, so £2000 will be tax free, and you get £6000. Do they take tax, thinking that you'll be getting £6000 per month for the rest of the tax year? Thanks.

xylophone

https://www.pensionsadvisoryservice.org.uk/content/publications-files/uploads/Taking_small_pensions_Detailed_SPOT008_V1.5.pdf

If you are giving up a pension which isn’t in payment, then the first 25% of the lump sum payment will be tax free and the remaining 75% will be deemed as income for tax purposes.
Pension providers have been told by HMRC to deduct tax at source and pay you the balance.



http://www.taxvol.org.uk/about-tax/cashed-small-pension/

Since 2013 the taxable portion of the lump sum will be taxed at Basic Rate (BR). In many cases this will be correct and there will be no further tax due or tax to be repaid. For those of you, however, who started from a non-taxpayer position, i.e. other income below their personal allowances, there will be a need to ask for an immediate repayment using form P53, (available by calling HMRC, 0300 200 3300 or the online version at https://www.hmrc.gov.uk) since you will have lost out on the unused part of your allowances; whereas those who get pushed into a higher tax band by the addition of the lump sum may need to pay some extra tax.