Tax on multiple pensions

Albermarle

I will probably retire early next year so have been giving extra thought to the practicalities of having income from multiple sources.
If I take my DB pension , which I probably will , it will be a bit above my personal allowance of £12,500 . So from what I understand the personal allowance should  be allocated to my DB income and then any taxable income from a DC pension will be taxed at 20% ( I will not be a HRT in retirement )
But what happens if instead of a regular drawdown income , I take a single lump sum say as a UFPLS payment of £20K .so £15k taxable . Will HMRC assume I am taking 12X £15K pa (  £180 K)  from the pension and take a huge chunk of tax at 20%/40%/45% , which I will have to claim back later ?
I know from other threads this does happen with one off lump sums , but I was wondering if it still happened if there was already a regular income ( from the DB pension ) and a tax code in place ?

AnotherJoe

I think generally they will take too much, Ive even read them doing that on the last payment of the tax year. From their perspective its  a new payment youve started.

Any reason why you'd do it as a one off rather than spread over the year?

Linton

Pensions, other than State Pension, are taxed under PAYE in exactly the same way as wages.  The first ever payment from each income stream is taxed under a default tax code but for subsequent payments HMRC allocate a tax code per income stream which in total add up to your annual tax allowance. The  allocation can be modified in any way you want.
PAYE normally operates by allocating 1/12th of your tax allowance and tax band levels to each month,  These together with your income, accumulate over time and each month the tax you have paid in the year to date is assessed against that which you should have paid, you being charged the difference.  So by the end of the tax year your full income can be assessed against the full assigned tax allowance/bands.  Clearly this causes problems with one-off pension drawdowns as the full income will be taxed against reduced allowance possibly putting you into a higher rate tax band and there is no subsequent monthly payment when this could be corrected.
I know of 4 ways around this problem:
1) You can claim the tax back before the end of the tax year by use of the appropriate form.  See https://www.gov.uk/government/publications/income-tax-repayment-claim-when-small-pension-taken-as-a-lump-sum-p53
2) You take your lump sum at the end of the tax year - this wont work if you have been assigned a "Month 1" tax code under which the accumulation does not operate.
3) You can ask HMRC to allocate a BR tax code to the drawdown stream which will force Basic Rate tax to be deducted with no allowances.  Your allowances are then split amongst your other income streams.  Clearly you need sufficient other taxable income to use up your total tax allowance. Setting a BR code also helps when your drawdown varies significantly year by year.
4) You wait until after the end of the tax year when HMRC will send you a refund.

Albermarle

Any reason why you'd do it as a one off rather than spread over the year?

Just trying to clarify all options but from Linton's post above it looks like a regular ( but possibly variable )  drawdown ( point 3 ) with a BR tax code might be the easiest option anyway .

Linton

That is how my drawdown works. I tend to drawdwn different amounts once each year and my tax has always been right within the normal bounds.

molerat

A BR code will pay the correct tax within the usual 20p accuracy.

With a code allocated a withdrawal in March will ensure the annual tax is correct.

saver_ali

I wasn’t drawing a DB when I took my first UFPLS, in 2016-17, and emergency tax was deducted. I got it back quite quickly by filling out a form. HMRC then sent the provider a tax code for future use.

Then, in 2017-18, I started drawing my DB and also took another small UFPLS in March 2018 to use up my personal allowance. It was taxed even though none was technically due, but I expected that. I thought I’d leave it to HMRC to sort - it took 14 months for them to do the calculation, and then they got it wrong. It was a complete mess because they’d also, out of the blue, carried forward some gift aid that I’d claimed way back in 2015, before I retired, and were trying to charge me as if I’d claimed it in 17-18 too but I hadn’t (if you are a non-taxpayer you can’t apply for gift aid).

I’ve since been told by a pensions advisor that if you want to take an UFPLS, take a small one first, so the tax deduction will be minimal, and HMRC will send the provider a Tax code for future use. That tax code will be in place for any subsequent withdrawals, so you can then take a bigger amount with the correct deductions.

For my husband, we’re not going to use UFPLSs. He’s in flexible drawdown from a SIPP, and I’ve been transferring his various DCs to that SIPP. He’ll start drawing his DB in a few years, and so I’m expecting him to have separate tax codes for the DB and the SIPP. Thanks for the suggestion above - I’ll ask for a BR code for the SIPP.