Drawdown Pot withdrawals - avoid having to reclaim tax

justintime99

Retiring shortly and wondering how to best take withdrawals from my Drawdown pot to avoid having to claim tax back.
I'll be getting ~£17000k per year from company pension scheme. For my SIPP I'll take 25% lump sum tax free and rest will be in the drawdown pot. From dividends I will take a regular monthly sum of £500 gross. However, I want to take extra from the drawdown pot each year so my taxable income will be just under the 40% bracket (so £50k this year). Cash will be used to live on and pay into ISA.
Option 1: sell shares monthly / quarterly & take a higher monthly withdrawal. OK, but a PITA & incur fees buying/selling.
Option 2: Lump sum of ~25k. As I understand it this would be taxed as if I were going to take £25k per month so I would overpay tax by £5k, which I would reclaim later. I can understand this if taking a lump sum early in the tax year, but does this also apply if I take the lump sum in March?

Linton

After your first ever drawdown HMRC will allocate a taxcode to your pension provider. From then on you should be able to arrange to never need to claim a tax refund. You can change the assumed incomes that drive the tax code allocation by adjusting the assumed income given in your online tax account. HMRC will also change the tax codes on request.



In my case as my drawdown can be variable I have arranged it to be given a BR tax code with the tax allowance split between my other income streams. I then take any large lump sum drawdown towards the end of the tax year.


PAYE operates by assigning 1/12th of your tax allowance and tax bands to each month and accumulating any which are unused. If you take a lump sum at the start of the year of more than 1/12 of your start of Higher Rate band you will be charged higher rate tax that will need to be refunded later either as part of subsequent drawdowns or from HMRC. By taking a lump sum at the end of the year you will have accumulated sufficient to avoid going into HRT. Also you will know your income for the year and can if you wish withadraw the maximum at basic tate.

Dazed_and_confused

Option 2: Lump sum of ~25k. As I understand it this would be taxed as if I were going to take £25k per month so I would overpay tax by £5k,

If £25k of taxable income was taken as the first withdrawal then £9,530.65 tax would be deducted.

The pension company allocate the tax code themselves for the first payment.

They then notify HMRC of the payment and HMRC will issue a tax code to be used thereafter. Which obviously may change again if your circumstances change or when the tax year changes.

Dazed_and_confused

wondering how to best take withdrawals from my Drawdown pot to avoid having to claim tax back.

You don't actually have to "claim" it back.

If you file Self Assessment returns then it all comes out in the wash via your return.

Otherwise HMRC will review your tax position after the end of each tax year and automatically refund any tax overpaid (or send you a bill if underpaid).

The simplest way to avoid paying too much tax is to make sure the first payment is less than £1,042 (assuming it is in the current tax year). The issue then though is that as the emergency tax code will be used you may well end up owing tax to HMRC.

hyperhypo

I'm resurrecting this thread hopefully as have a slight variation on OP's original question, ie trying to avoid retrospectively claiming tax back in drawdown, but in same subject area as hmrc tax codes.

Next year 21/22 tax year i will make my first drawdown from my DC SIPP (80% crystallised,  no income yet).

I wish to take up to annual personal allowance, let's assume £12500, Provider is Fidelity. No more in 21/22.

Is there any way to signal hmrc that drawdown will be aligned with lijmit of personal allowance ?

I have read of initiating drawdown with a nominal amount to start (e.g. £100), then a second and subsequent payment of £1033 each month.

Am i on the right lines here please ?

Brynsam

hyperhypo said:

I'm resurrecting this thread hopefully as have a slight variation on OP's original question, ie trying to avoid retrospectively claiming tax back in drawdown, but in same subject area as hmrc tax codes.

Next year 21/22 tax year i will make my first drawdown from my DC SIPP (80% crystallised,  no income yet).

I wish to take up to annual personal allowance, let's assume £12500, Provider is Fidelity. No more in 21/22.

Is there any way to signal hmrc that drawdown will be aligned with lijmit of personal allowance ?

I have read of initiating drawdown with a nominal amount to start (e.g. £100), then a second and subsequent payment of £1033 each month.

Am i on the right lines here please ?

No, you can't 'signal' to HMRC, but if you follow the advice above about making one small withdrawal, that will trigger the issue of a tax code to Fidelity to ensure a more substantial payment later in the tax year isn't instantly clobbered with a disproportionately high amount of tax.

hyperhypo

Thanks Brynsam, i'm alert to this as had a redundancy payment clobbered by a high amount of tax earlier in this tax year...in April, although it related to employment terminating end of March, so trying to make sure it doesn't happen again in drawdown next tax year.

Dazed_and_C0nfused

The emergency tax code on a non cumulative basis should be used for the first payment so providing this is less than £1,042 then no tax would be deducted.  There is really no need to take a very small first payment.

You can continue to take £1,042 each month and no tax would be deducted if HMRC allocate you the emergency tax code (1250L) on a cumulative basis.

If you need any tax code adjustments which mean a different tax code is calculated then the £1,042 figure for subsequent payments will be different.  

Thrugelmir

hyperhypo said:

Thanks Brynsam, i'm alert to this as had a redundancy payment clobbered by a high amount of tax earlier in this tax year...in April, although it related to employment terminating end of March, so trying to make sure it doesn't happen again in drawdown next tax year.

April is month 1 of the tax year. Large deduction is unavoidable if a lump sum is withdrawn. Tax system is designed to be cumulative and in essence self correct by mth 12 (by following March). 

MEM62

justintime99 said:

However, I want to take extra from the drawdown pot each year so my taxable income will be just under the 40% bracket (so £50k this year). Cash will be used to live on and pay into ISA.

Appreciate I am late to the party here but there is one thing that I cannot get my head around.  You are proposing to to take money from your pension, where is sits inside a tax-wrapper, loose 20% of it and put it in an ISA.  ie Taking £100 out of your pension pot to put £80 into an ISA.  I am struggling with the logic there.     

Dazed_and_C0nfused

Cash will be used to live on and pay into ISA.

Maybe they meant it is needed to live on and will be paid into a (Cash) ISA rather than a current account??