Are SIPP withdrawals taxed at source?

Barry_Bear

From a service aimed at expats promoting the benefits of QROPS:

"Drawing down an income from your SIPP as an expat can be complicated. Tax can be deducted at source in the UK and this will involve administrative procedures to reclaim UK tax from HMRC."

This infers that a retiree tax resident outside the UK when they start withdrawing from their SIPP, will not get their income gross. Is that true?
Does the SIPP provider / fund platform automatically make a tax deduction from any amount withdrawn, if so is the deduction at the basic rate by default, or if not what rate is applied?

dunstonh

This infers that a retiree tax resident outside the UK when they start withdrawing from their SIPP, will not get their income gross. Is that true?

The crystallised element of the withdrawal is paid via a payroll system and initially taxed.   Your next action would depend on where you are resident and the tax treaties that exist.

Barry_Bear

dunstonh said:

This infers that a retiree tax resident outside the UK when they start withdrawing from their SIPP, will not get their income gross. Is that true?

The crystallised element of the withdrawal is paid via a payroll system and initially taxed.   Your next action would depend on where you are resident and the tax treaties that exist.

So withdrawals are automatically taxed, never received gross? Does the SIPP provider make a deduction at the basic rate by default, or if not what rate is applied?

Thrugelmir

Barry_Bear said:

dunstonh said:

This infers that a retiree tax resident outside the UK when they start withdrawing from their SIPP, will not get their income gross. Is that true?

The crystallised element of the withdrawal is paid via a payroll system and initially taxed.   Your next action would depend on where you are resident and the tax treaties that exist.

So withdrawals are automatically taxed, never received gross? Does the SIPP provider make a deduction at the basic rate by default, or if not what rate is applied?

Deducts the appropriate amount of tax at the time of withdrawal. The provider makes the payments through a payroll system and operates same in accordance with the PAYE system. 

NSG666

I'm currently in England but looking to move to Portugal.

Perhaps slightly different to what you are wanting to do but I've recently withdrawn a UFPLS (lump sum) from my SIPP and this was the first time I'd drawn on the SIPP. 25% of this was tax free and remainder was taxed but at an emergency rate which worked out for me at c.32.5%. I'm not planning on withdrawing any more this tax year but if I did I believe that HMRC will now have given my SIPP provider notification that they only need to tax me at 20%. I immediately submitted a P50 to claim the tax back but it's taking a long time as HMRC are snowed under with claims for 2020/21 tax year due to covid.

In your cased the initial income payments may have an emergency tax code supplied but should settle down once HMRC notify your SIPP provider what to deduct. I guess you'll have to wait until the end of each tax year to claim back any tax paid to HMRC assuming you are a tax resident outside of the UK.

I've been looking into QROPS myself and it seemed for me it would save being taxed by HMRC and having to claim it back but I don't have a problem doing this. Another benefit they push is the exchange rate varying your income but this is something I'm prepared to live with the risk. I did come across an interesting and quite scathing article written by an financial adviser who deals with these things and they reckoned that 95% of people who are talked into switching to QROPS do not need to or benefit from doing so - they did say it can benefit those who are in danger of tipping over the lifetime allowance which ain't me.

Barry_Bear

Thrugelmir said:

Barry_Bear said:

dunstonh said:

This infers that a retiree tax resident outside the UK when they start withdrawing from their SIPP, will not get their income gross. Is that true?

The crystallised element of the withdrawal is paid via a payroll system and initially taxed.   Your next action would depend on where you are resident and the tax treaties that exist.

So withdrawals are automatically taxed, never received gross? Does the SIPP provider make a deduction at the basic rate by default, or if not what rate is applied?

Deducts the appropriate amount of tax at the time of withdrawal. The provider makes the payments through a payroll system and operates same in accordance with the PAYE system. 

 
This SIPP provider payroll and PAYE system is confusing.
 
Why would a SIPP provider (the fund platform e.g. Interactive Investor, A J Bell?) have a PAYE system (in my case I don't even pay PAYE) or know what the "appropriate" tax rate is to deduct? You could have no income other than what you are withdrawing from the SIPP, or be basic or higher rate tax payer from other income - how would they know? As far as I know a SIPP account has a name, address, NI number, possibly an employer or company directors company name. So how does this automated tax deduction work exactly?

Dazed_and_C0nfused

Taxable income taken from a SIPP is treated the same as earnings.

The SIPP provider will have a PAYE scheme with HMRC and report the taxable pension under the Real Time Information system.

They have to have a PAYE scheme for their staff and may well use a different one for their pension customers.

The emergency tax code (1257L) is operated, on a non cumulative basis, on the first payment and once notified to HMRC they will then determine if a different tax code needs to be issued to the pension payer.

Use of the emergency code can mean you pay too much tax or owe extra tax (no tax is deducted from the first £1,048 when the emergency tax code is used).

This is all standard stuff for pension companies and HMRC.

[Deleted User]

I have not got to this stage yet, but as I understand it, for Canadian residents it works as follows:

1. As you leave, advise HMRC that you have left the UK via the HMRC form P85.

2. You should also get CRA to sign and stamp the UK dual taxation agreement form (there is no for number) and send that to HMRC, that confirms that you are now a Canadian tax payer and means that HMRC will issue your UK pension provider with an 'NT' tax code (i.e. no tax) so that your pension provider would not deduct UK tax at source when they start paying you. 

3. You would of course have to declare this in Canada and be taxed in Canada.

[Deleted User]

Here is the Canadian form. Similar forms for other countries. Most helpfully, this form is available in Welsh.  

https://www.gov.uk/government/publications/double-taxation-united-kingdomcanada-si-1980-number-709-and-protocols-form-canadaindividual

Linton

Barry_Bear said:

Thrugelmir said:

Barry_Bear said:

dunstonh said:

This infers that a retiree tax resident outside the UK when they start withdrawing from their SIPP, will not get their income gross. Is that true?

The crystallised element of the withdrawal is paid via a payroll system and initially taxed.   Your next action would depend on where you are resident and the tax treaties that exist.

So withdrawals are automatically taxed, never received gross? Does the SIPP provider make a deduction at the basic rate by default, or if not what rate is applied?

Deducts the appropriate amount of tax at the time of withdrawal. The provider makes the payments through a payroll system and operates same in accordance with the PAYE system. 

 
This SIPP provider payroll and PAYE system is confusing.
 
Why would a SIPP provider (the fund platform e.g. Interactive Investor, A J Bell?) have a PAYE system (in my case I don't even pay PAYE) or know what the "appropriate" tax rate is to deduct? You could have no income other than what you are withdrawing from the SIPP, or be basic or higher rate tax payer from other income - how would they know? As far as I know a SIPP account has a name, address, NI number, possibly an employer or company directors company name. So how does this automated tax deduction work exactly?

PAYE is the standard way of paying taxable income.  It is not worth while developing new software and a new interface to HMRC just for drawdown, much easier to use software and procedures that already exists.  Under PAYE the appropriate tax rate is calculated from the tax code which is supplied by HMRC.

NSG666

Deleted_User said:

I have not got to this stage yet, but as I understand it, for Canadian residents it works as follows:

1. As you leave, advise HMRC that you have left the UK via the HMRC form P85.

2. You should also get CRA to sign and stamp the UK dual taxation agreement form (there is no for number) and send that to HMRC, that confirms that you are now a Canadian tax payer and means that HMRC will issue your UK pension provider with an 'NT' tax code (i.e. no tax) so that your pension provider would not deduct UK tax at source when they start paying you. 

3. You would of course have to declare this in Canada and be taxed in Canada.

Thank you Mordko

 HMRC don't make this easy to find - I've done varying search terms on their web-site and none of them flagged up the P85. I'll contact them on Monday to confirm whether this is the form to use when retired and clarify whether pension payments can me made gross as I need to know for myself.

Barry_Bear I'm convinced these people pushing QROPS deliberately leave this type of info out of their sales patter to make QROPS sound like the 'must have' solution.