HMRC taking too much tax on ad hoc pension drawdown - anyone else experienced this?

MissBojangles

I take £16k annually (in monthly installments) from my SIPP, which is my only income so I pay nominal tax.  I have the standard personal tax allowance.

I have asked for two small ad-hoc payments from my SIPP this tax year.  The first one was in November 2022 - £7k, on which I was taxed £2.5k.  HMRC said this was because their calculations sometimes treat an ad-hoc payment as though it is now your regular monthly income and they adjust your tax accordingly.  I explained it was an ad-hoc payment and they apologised and asked me to complete a P55, which I did.  Its now January and I still have not had the refund.

I am due to pick up a car this week and I requested a further amount from my pension pot.  I need £10k so asked for £13k gross, thinking this would give me enough net to get my car.  My money came through today and HMRC have taken almost £5k of it.  I am furious as I now don't have enough to pick up my car.

HMRC have now said to me today that this will ALWAYS happen when an ad-hoc drawdown payment is taken from my SIPP.  Surely this can't be right?  It basically means that if I want to withdraw xxx amount from my SIPP, even as a lower rate tax payer, I am going to have to withdraw enough to allow HMRC to take 40%, then fill in a P55 and wait 4/5 months for them to give me my refund, which all the time should have remained in my pension pot gaining interest!

Has anyone else experienced this?

comeandgo

Yes, that’s the way the tax system deals with ad hoc payments.

Dazed_and_C0nfused

MissBojangles said:

I take £16k annually (in monthly installments) from my SIPP, which is my only income so I pay nominal tax.  I have the standard personal tax allowance.

I have asked for two small ad-hoc payments from my SIPP this tax year.  The first one was in November 2022 - £7k, on which I was taxed £2.5k.  HMRC said this was because their calculations sometimes treat an ad-hoc payment as though it is now your regular monthly income and they adjust your tax accordingly.  I explained it was an ad-hoc payment and they apologised and asked me to complete a P55, which I did.  Its now January and I still have not had the refund.

I am due to pick up a car this week and I requested a further amount from my pension pot.  I need £10k so asked for £13k gross, thinking this would give me enough net to get my car.  My money came through today and HMRC have taken almost £5k of it.  I am furious as I now don't have enough to pick up my car.

HMRC have now said to me today that this will ALWAYS happen when an ad-hoc drawdown payment is taken from my SIPP.  Surely this can't be right?  It basically means that if I want to withdraw xxx amount from my SIPP, even as a lower rate tax payer, I am going to have to withdraw enough to allow HMRC to take 40%, then fill in a P55 and wait 4/5 months for them to give me my refund, which all the time should have remained in my pension pot gaining interest!

Has anyone else experienced this?

Are you taking this money from the same pension as the £16k?

If so I would expect the tax to be correct.

Or is it being treated as a separate pension by your pension company?

If it is a separate one then after the first payment you should get a BR (basic rate) tax code allocated to it.

Unless you now have three different pensions for tax purposes?

MissBojangles

Dazed_and_C0nfused said:

MissBojangles said:

I take £16k annually (in monthly installments) from my SIPP, which is my only income so I pay nominal tax.  I have the standard personal tax allowance.

I have asked for two small ad-hoc payments from my SIPP this tax year.  The first one was in November 2022 - £7k, on which I was taxed £2.5k.  HMRC said this was because their calculations sometimes treat an ad-hoc payment as though it is now your regular monthly income and they adjust your tax accordingly.  I explained it was an ad-hoc payment and they apologised and asked me to complete a P55, which I did.  Its now January and I still have not had the refund.

I am due to pick up a car this week and I requested a further amount from my pension pot.  I need £10k so asked for £13k gross, thinking this would give me enough net to get my car.  My money came through today and HMRC have taken almost £5k of it.  I am furious as I now don't have enough to pick up my car.

HMRC have now said to me today that this will ALWAYS happen when an ad-hoc drawdown payment is taken from my SIPP.  Surely this can't be right?  It basically means that if I want to withdraw xxx amount from my SIPP, even as a lower rate tax payer, I am going to have to withdraw enough to allow HMRC to take 40%, then fill in a P55 and wait 4/5 months for them to give me my refund, which all the time should have remained in my pension pot gaining interest!

Has anyone else experienced this?

Are you taking this money from the same pension as the £16k?

If so I would expect the tax to be correct.

Or is it being treated as a separate pension by your pension company?

If it is a separate one then after the first payment you should get a BR (basic rate) tax code allocated to it.

Unless you now have three different pensions for tax purposes?

All the same pension pot

Dazed_and_C0nfused

MissBojangles said:

Dazed_and_C0nfused said:

MissBojangles said:

I take £16k annually (in monthly installments) from my SIPP, which is my only income so I pay nominal tax.  I have the standard personal tax allowance.

I have asked for two small ad-hoc payments from my SIPP this tax year.  The first one was in November 2022 - £7k, on which I was taxed £2.5k.  HMRC said this was because their calculations sometimes treat an ad-hoc payment as though it is now your regular monthly income and they adjust your tax accordingly.  I explained it was an ad-hoc payment and they apologised and asked me to complete a P55, which I did.  Its now January and I still have not had the refund.

I am due to pick up a car this week and I requested a further amount from my pension pot.  I need £10k so asked for £13k gross, thinking this would give me enough net to get my car.  My money came through today and HMRC have taken almost £5k of it.  I am furious as I now don't have enough to pick up my car.

HMRC have now said to me today that this will ALWAYS happen when an ad-hoc drawdown payment is taken from my SIPP.  Surely this can't be right?  It basically means that if I want to withdraw xxx amount from my SIPP, even as a lower rate tax payer, I am going to have to withdraw enough to allow HMRC to take 40%, then fill in a P55 and wait 4/5 months for them to give me my refund, which all the time should have remained in my pension pot gaining interest!

Has anyone else experienced this?

Are you taking this money from the same pension as the £16k?

If so I would expect the tax to be correct.

Or is it being treated as a separate pension by your pension company?

If it is a separate one then after the first payment you should get a BR (basic rate) tax code allocated to it.

Unless you now have three different pensions for tax purposes?

All the same pension pot

If that is the case then why didn't the pension company simply deduct tax as normal on the extra £7k?

If that £7k had been paid in the same month as the £1,333 you normally take then you would have only paid £1,400 tax on it, not £2.5k.

The fact that you have been told you can claim a refund also adds weight to this being a separate pension.  If it was just one pension then there would rarely be a refund due and even if there was one it would be paid by the pension company the next time they make a normal £1,333 payment.

I suspect there is more to this than you think.

Have you checked your PTA to see what that shows?

One pension, two or three?

penners324

This is on your pension company not HMRC....

Pat38493

Dazed_and_C0nfused said:

MissBojangles said:

Dazed_and_C0nfused said:

MissBojangles said:

I take £16k annually (in monthly installments) from my SIPP, which is my only income so I pay nominal tax.  I have the standard personal tax allowance.

I have asked for two small ad-hoc payments from my SIPP this tax year.  The first one was in November 2022 - £7k, on which I was taxed £2.5k.  HMRC said this was because their calculations sometimes treat an ad-hoc payment as though it is now your regular monthly income and they adjust your tax accordingly.  I explained it was an ad-hoc payment and they apologised and asked me to complete a P55, which I did.  Its now January and I still have not had the refund.

I am due to pick up a car this week and I requested a further amount from my pension pot.  I need £10k so asked for £13k gross, thinking this would give me enough net to get my car.  My money came through today and HMRC have taken almost £5k of it.  I am furious as I now don't have enough to pick up my car.

HMRC have now said to me today that this will ALWAYS happen when an ad-hoc drawdown payment is taken from my SIPP.  Surely this can't be right?  It basically means that if I want to withdraw xxx amount from my SIPP, even as a lower rate tax payer, I am going to have to withdraw enough to allow HMRC to take 40%, then fill in a P55 and wait 4/5 months for them to give me my refund, which all the time should have remained in my pension pot gaining interest!

Has anyone else experienced this?

Are you taking this money from the same pension as the £16k?

If so I would expect the tax to be correct.

Or is it being treated as a separate pension by your pension company?

If it is a separate one then after the first payment you should get a BR (basic rate) tax code allocated to it.

Unless you now have three different pensions for tax purposes?

All the same pension pot

If that is the case then why didn't the pension company simply deduct tax as normal on the extra £7k?

If that £7k had been paid in the same month as the £1,333 you normally take then you would have only paid £1,400 tax on it, not £2.5k.

The fact that you have been told you can claim a refund also adds weight to this being a separate pension.  If it was just one pension then there would rarely be a refund due and even if there was one it would be paid by the pension company the next time they make a normal £1,333 payment.

I suspect there is more to this than you think.

Have you checked your PTA to see what that shows?

One pension, two or three?

Wouldn't this depend partly on the software they are using for their payroll?  I see the same in my company where if I get some kind of one off payment in my PAYE, I might pay too much tax for the next month or two and then it will align itself again - in this context it also depends whether they are using a cumulative tax code or a month by month tax code (not sure if you can have the same kind of issue with pensions in regular payment).

MissBojangles

Dazed_and_C0nfused said:

MissBojangles said:

Dazed_and_C0nfused said:

MissBojangles said:

I take £16k annually (in monthly installments) from my SIPP, which is my only income so I pay nominal tax.  I have the standard personal tax allowance.

I have asked for two small ad-hoc payments from my SIPP this tax year.  The first one was in November 2022 - £7k, on which I was taxed £2.5k.  HMRC said this was because their calculations sometimes treat an ad-hoc payment as though it is now your regular monthly income and they adjust your tax accordingly.  I explained it was an ad-hoc payment and they apologised and asked me to complete a P55, which I did.  Its now January and I still have not had the refund.

I am due to pick up a car this week and I requested a further amount from my pension pot.  I need £10k so asked for £13k gross, thinking this would give me enough net to get my car.  My money came through today and HMRC have taken almost £5k of it.  I am furious as I now don't have enough to pick up my car.

HMRC have now said to me today that this will ALWAYS happen when an ad-hoc drawdown payment is taken from my SIPP.  Surely this can't be right?  It basically means that if I want to withdraw xxx amount from my SIPP, even as a lower rate tax payer, I am going to have to withdraw enough to allow HMRC to take 40%, then fill in a P55 and wait 4/5 months for them to give me my refund, which all the time should have remained in my pension pot gaining interest!

Has anyone else experienced this?

Are you taking this money from the same pension as the £16k?

If so I would expect the tax to be correct.

Or is it being treated as a separate pension by your pension company?

If it is a separate one then after the first payment you should get a BR (basic rate) tax code allocated to it.

Unless you now have three different pensions for tax purposes?

All the same pension pot

If that is the case then why didn't the pension company simply deduct tax as normal on the extra £7k?

If that £7k had been paid in the same month as the £1,333 you normally take then you would have only paid £1,400 tax on it, not £2.5k.

The fact that you have been told you can claim a refund also adds weight to this being a separate pension.  If it was just one pension then there would rarely be a refund due and even if there was one it would be paid by the pension company the next time they make a normal £1,333 payment.

I suspect there is more to this than you think.

Have you checked your PTA to see what that shows?

One pension, two or three?

I have two separate pensions.  One is with L&G and is only £2240 a year.  The tax code on this is 224L
My other pension is my SIPP.  This is the one where I take £1333 a month gross (£1216 net).  This is the only pot I have and my tax code is 882T.  I pay thr right amount of tax monthly and would expect to pay 20% on any ad-hoc payments I took this tax year (knowing they would be small).  I took £7000 gross as an ad-hoc in November and paid £2300 tax and now have taken £13k gross as an ad-hoc and have paid £5k tax). 

HMRC say that the only way I can get this money back is by filling out a P55 and waiting 3/4/5 months for them to process it.  Aegon (SIPP provider) say they tell HMRC the gross payment and HMRC tell them what to pay net.  They have said they cannot help and that it is HMRC that need to sort this out for me.  

I do not want to take a penny more out of my SIPP than I need to, yet it appears that if I ever want an ad-hoc payment, I will need to factor in a tax overpayment to HMRC and a go through a manual process to request this back.  I am only allowed to put £4k back into my SIPP annually so this seems like a ridiculous situation that will deplete my SIPP funds unnecessarily if I ever want an ad-hoc payment?

Linton

As HMRC indicated it is probably the way PAYE works.  If you take a lump sum half way through the tax year, when the tax is calculated you will only have accrued half the tax allowance and half the tax bands. Therefore there is a chance you will be taxed at a higher rate. If you can let us know your normal pension drawdown, the tax refund, and the pension tax code we may be able to explain it in greater detail for you.

The best answer is to maintain a significant cash balance outside your pension to cover emergencies and large one-off expenses, a strategy which many people on the forum adopt anyway to deal with stock market fluctuations.  Alternatively delay your lump sum withdrawals until the end of the tax year by when you would have accrued your full allownce and tax bands.

The above details assume you have a normal tax code.  If the tax code is non-cumulative with an X or M1 at the end then the effect is more pronounced.

MissBojangles

Linton said:

As HMRC indicated it is probably the way PAYE works.  If you take a lump sum half way through the tax year, when the tax is calculated you will only have accrued half the tax allowance and half the tax bands. Therefore there is a chance you will be taxed at a higher rate. If you can let us know your normal pension drawdown, the tax refund, and the pension tax code we may be able to explain it in greater detail for you.

The best answer is to maintain a significant cash balance outside your pension to cover emergencies and large one-off expenses, a strategy which many people on the forum adopt anyway to deal with stock market fluctuations.  Alternatively delay your lump sum withdrawals until the end of the tax year by when you would have accrued your full allownce and tax bands.

The above details assume you have a normal tax code.  If the tax code is non-cumulative with an X or M1 at the end then the effect is more pronounced.

I have two separate pensions.  One is with L&G and is only £2240 a year.  The tax code on this is 224L
My other pension is my SIPP.  This is the one where I take £1333 a month gross (£1216 net).  This is the only pot I have and my tax code is 882T.  I pay thr right amount of tax monthly and would expect to pay 20% on any ad-hoc payments I took this tax year (knowing they would be small).  I took £7000 gross as an ad-hoc in November and paid £2300 tax and now have taken £13k gross as an ad-hoc and have paid £5k tax). 

Dazed_and_C0nfused

I really do think you need to check your Personal Tax Account to see how your SIPP provider has reported this.

It does seem highly likely that you now have three or four pensions.  At least for tax purposes.