HMRC Month 1 tax code – first pension payment

BaileysOriginal

I am currently not working and haven’t worked this tax year.  I now wish to access one of my pension pots taking the full 25% tax free amount from that pot, and additionally the full tax allowance this year of £12570.

Q- Does anyone know how long does it take for HMRC to confirm my personal tax code, and how will they confirm it?  I do have a .gov gateway account, so is this the best way of finding out or will they write to me?

Some background:

I finished work at the end of 2020 and do not plan to take up paid work again.  I can claim my main final salary pension without actuarial reduction at 60 (I am about to turn 57). This is expected to provide (what I consider) a good pension, but I have also built up some DC pots. I now want to contribute more cash to our household to fund some small house projects, and to ease my guilt of not contributing since finishing work early. The idea is to use one of these pots to access my annual ~£12570 personal allowance each year tax free until my final salary pension kicks in.

I have requested an illustration from L&G to take 25% tax free of a worksave pension plan fund (approx. £14000), plus £12570 income from this fund.  However, I read on the application form that the first income payment will be taxed using the emergency tax code on a month 1 basis until the HMRC confirm your personal tax code.  

I will therefore now only request £1000 on the application form provided as a first taxable income payment. When the HMRC confirm a tax code for me I will revisit this pension pot and request the remaining tax-free allowance 11570 before the end of this tax year.  I'd rather do it this way around than have to claim back overpaid tax.

Next tax year I presume I need to request the personal tax limit to be paid to me in 12 monthly instalments to avoid the same problem.

Also, as I originally stated to L&G that I wanted £12570 as income from this fund and they sent the illustration based on that, do you know if this will cause a big kerfuffle and L&G will refuse the application as the amount I now want to request is less?  Do you think I will have to start from scratch and ask L&G to send a new quotation to keep the Financial Conduct Authority happy – or am I overthinking it?

Forum posters, Thank you. I often find myself reading and trying to learn from this forum.

Dazed_and_C0nfused

A tax code should be calculated within a few days of the pension company submitting the first payment details via the Real Time Information (RTI) system.

It is likely to be the emergency tax code (1257L) to be operated on a cumulative basis rather than the non cumulative basis.

molerat

From experience it will be a matter of a few days from HMRC being notified, it was next day for my first withdrawal from HL, and it will show up in your on line tax account immediately. If you receive snail mail correspondence a letter will follow.  If you have no other income this year they will likely allocate the full allowance but to get the most out of that you will need to make monthly withdrawals - the next one could be quite large - or wait until March to take the remaining full amount.

green_man

You will be doing better than me if you manage to arrange this without having to reclaim tax afterwards. I had multiple calls/chats to HMRC before I withdrew my UFPLS and still all tax was paid on an assumed Month1 basis.  The P55 process to claim back is pretty straightforward though if your case isn’t complex. The reclaim process should take under 3 weeks, though my last claim took 6 weeks due to “covid”.

molerat

You won't achieve anything calling HMRC in advance as no tax account is set up with the pension co until you have a notifiable event. You need to make a first small withdrawal, if under £1398 no tax will be deducted, and a tax code will be duly allocated by HMRC.  You can then get that code corrected if necessary then proceed with further withdrawals.

sheslookinhot

This is also my intention next March/ April 2022. I will ask my SIPP provider to give me a 25% TFLS first of all, about 15k. Then in August I will request a monthly payment of just around £1,000 for 3 years until my state pension comes into payment.

The only doubt I have, hopefully the knowledgeable folks here can comment, is whether the TFLS will be taxed and thus requiring me to claim back the tax. Can anyone advise please ?

molerat

The TAX FREE lump sum will not be taxed !

Dansmam

molerat said:

You need to make a first small withdrawal, if under £1398 no tax will be deducted, and a tax code will be duly allocated by HMRC.  You can then get that code corrected if necessary then proceed with further withdrawals.

Did exactly this and hmrc generated a basic rate taxcode (all I'm entitled to) which has been applied each month since. I'd already taken the tax free lump sum. I withdrew slightly more last month and slightly more tax was deducted so at end of year I think it should all be in order with no need to mess about with hmrc claims for under/over payments.

jamesd

Yes, if you're content to get the overcharge returned via PAYE you can just set up regular monthly payments for the rest of the year and once the tax code is allocated you'll see negative income tax for each monthly payment for the year.

sheslookinhot

jamesd said:

Yes, if you're content to get the overcharge returned via PAYE you can just set up regular monthly payments for the rest of the year and once the tax code is allocated you'll see negative income tax for each monthly payment for the year.

Do you mean when you take a large withdrawal when commencing drawdown ? 

jamesd

Large or repeated larger than usual. For example, this year early on I've been taking higher monthly payments at 100k/12 per month so in the final few months perhaps £100 of regular payment will have substantial tax refunds added because the front loading caused lots of 40% tax to be charged but I won't actually be going over basic rate liability.

I chose 100k/12 to avoid any months having to deal with reduced personal allowance issues.

Front loading like this is a way in part to get the money out before VCT season when I'm investing enough in VCTs to almost  eliminate my basic rate tax liability. It also speeds up getting money out of the pension into higher interest paying things not available inside the pension.