Tax question if starting and then withdrawing a small SIPP

twiglet98

Faced with unexpected big spends recently I took the 25% TFLS from my HL SIPP, about £9500.  I have £4k left to clear my remaining credit card but it is on a 0% deal until August so there is no immediate need to do so and it seems silly to leave it in a current account.

I think I can put it back into a new HL SIPP, without falling foul to recycling rules, and receive the tax uplift a few weeks later, but I'm not clear on how best to withdraw the £4k by the time I need it again in August.

I am 16 months from State Pension age, work part time and will earn about £9k this tax year.  I expect to reduce my hours to earn about £8k in 2021-2022.

If the whole £4k that started the new SIPP is withdrawn then 75%, £3k, will be taxable.  Yet that, plus my salary, will still be below the Personal Allowance.  Would I be taxed at the point of withdrawal and not be able to reclaim it until after April 2022?

Dazed_and_C0nfused

The emergency tax code would be used on the first withdrawal so if this was £1,048 or  less then no tax would be deducted.

If you took more than that some tax would be deducted but you can usually claim any overpaid tax back before the tax year ends.  Have a look at forms P53 and P55 on gov.uk.

where_are_we

Earnings of £9K for 20-21 will mean HMRC will uplift your £4K net 20-21 contribution to £5K gross, provided you have not already made large pension contributions in 20-21. You have 5 weeks before the end of the tax year to do this and HMRC take 6 to 8 weeks to add the money. You will then have 2 parts to your HL account - an HL SIPP worth £5K (leave in cash)  and a larger HL SIPP in drawdown. To pay off your £4K credit card before August, you need to apply in 21-22 for a UFPLS from your SIPP of £4950 once it is worth £5K (leaving £50 cash in your SIPP to keep it open). 25% will be tax free = £1237.50 and 75% will be taxable = £3712.50. Your personal tax allowance for 21-22 (£12570 or £12500 depending on whether Mr Sunak freezes tax allowances on Wednesday) should cover your earnings and pensions for 21-22 ie £8000 + £3712.50 = £11,712.50 meaning you should pay no tax for 21-22. HMRC may take some tax which you can claim back. This means HL will pay out less than £4950 but it will still be more than the £4K needed.

twiglet98

where_are_we said:

Earnings of £9K for 20-21 will mean HMRC will uplift your £4K net 20-21 contribution to £5K gross, provided you have not already made large pension contributions in 20-21. You have 5 weeks before the end of the tax year to do this and HMRC take 6 to 8 weeks to add the money. You will then have 2 parts to your HL account - an HL SIPP worth £5K (leave in cash)  and a larger HL SIPP in drawdown. To pay off your £4K credit card before August, you need to apply in 21-22 for a UFPLS from your SIPP of £4950 once it is worth £5K (leaving £50 cash in your SIPP to keep it open). 25% will be tax free = £1237.50 and 75% will be taxable = £3712.50. Your personal tax allowance for 21-22 (£12570 or £12500 depending on whether Mr Sunak freezes tax allowances on Wednesday) should cover your earnings and pensions for 21-22 ie £8000 + £3712.50 = £11,712.50 meaning you should pay no tax for 21-22. HMRC may take some tax which you can claim back. This means HL will pay out less than £4950 but it will still be more than the £4K needed.

Thank you SO much for the detail and for doing the maths, it's not a lot but even on such a small budget I wanted to be sure.  It's very much appreciated!

where_are_we

Being a non tax payer is very advantageous for pension withdrawals but it`s a "use it or lose it" in each tax year. If your total earned income for 20-21 is about £9K (the 25% TFLS you have taken does not count towards this total I believe) you could withdraw £12500 - £9000 = £3500 from the HL SIPP in drawdown and pay no tax on this. All of the £3500 is taxable because you have already taken the 25% TFLS. However once you take an income from your SIPP in drawdown, you trigger the MPAA ( Money purchase annual allowance) which is £4K for 20-21. This means you only get tax relief on a maximum of £4K contribution. A £3500 withdrawal done in 20-21(do it in the next 5 weeks) will be tax free. However you will have to restrict yourself to £4K contribution (£3200 net by you) to your SIPP in 20-21 and not the £5K in my previous post. I do not know if this would trigger the "Pension Recycling" rule - it depends partly on if you are significantly increasing your contributions compared to previous years. Perhaps other forumites or even HL might help. Looking further ahead, if you carry on working once you are in receipt of your state pension you will probably become a tax payer and will not be able to withdraw from your SIPP in drawdown tax free. 

twiglet98

Thanks again for expanding your thoughts on this, it's slowly becoming clearer and less daunting!  I won't need to take any income during this financial year from the SIPP that is now in drawdown.

I have read the Pension Recycling rules again and see that no more than 30% of the PCLS can be put back into a pension, I will place that into a new SIPP this week and withdraw enough by July to clear my last outstanding debt.

I'll see what I can negotiate regarding my working hours until State Pension kicks in next year.  I may well carry on working much reduced hours beyond SPA but I'll think about  that nearer the time!

where_are_we

You may not "need" income from your SIPP in drawdown,  but being able to withdraw a £3500 tax free this tax year should not be missed. I do not know all your affairs and I apologise by sounding "bossy". If you continue to work part time plus receive your state pension your income may well exceed your PA (£12500 for 20-21) and you will pay 20% tax on any withdrawal from your SIPP in Drawdown in those tax years. You have a one off chance of saving £700 in tax this year.