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

dunstonh

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 am surprised they said sometimes as that is actually how it is meant to work.

 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 don't know why they apologised for something being done correctly.

  I am furious as I now don't have enough to pick up my car.

There is no need to be angry at yourself for your mistake.  You should have calculated it correctly but just make another withdrawal that is calculated correctly.

Surely this can't be right? 

Surely it is.

 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!

Or you let it correct itself over the remainder of the tax year as you are taking monthly payments.  It will end up with the correct figure by March.

Has anyone else experienced this?

Yes.  This is how PAYE works. 

Linton

MissBojangles said:

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 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). 

As your normal drawdown is fairly low compared with the higher rate tax band and November/January are over 50% through the tax year I cannot explain eiher of your lump sum tax charges from the figures you have given me.  ISTM you should have been clear of higher rate tax for both.

So, as @Dazed_and_C0nfused has suggested, something else appears to be happening. 

MissBojangles

dunstonh said:

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 am surprised they said sometimes as that is actually how it is meant to work.

 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 don't know why they apologised for something being done correctly.

  I am furious as I now don't have enough to pick up my car.

There is no need to be angry at yourself for your mistake.  You should have calculated it correctly but just make another withdrawal that is calculated correctly.

Surely this can't be right? 

Surely it is.

 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!

Or you let it correct itself over the remainder of the tax year as you are taking monthly payments.  It will end up with the correct figure by March.

Has anyone else experienced this?

Yes.  This is how PAYE works. 

Thanks for this.  So HMRC will always take circa 40% and refund it, rather than take 20%?  There is no way I can take just the amount I need out of my pension - I always have to take more (gross) to allow for HMRC to take extra and refund it a few months later?

Dazed_and_C0nfused

MissBojangles said:

dunstonh said:

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 am surprised they said sometimes as that is actually how it is meant to work.

 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 don't know why they apologised for something being done correctly.

  I am furious as I now don't have enough to pick up my car.

There is no need to be angry at yourself for your mistake.  You should have calculated it correctly but just make another withdrawal that is calculated correctly.

Surely this can't be right? 

Surely it is.

 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!

Or you let it correct itself over the remainder of the tax year as you are taking monthly payments.  It will end up with the correct figure by March.

Has anyone else experienced this?

Yes.  This is how PAYE works. 

Thanks for this.  So HMRC will always take circa 40% and refund it, rather than take 20%?  There is no way I can take just the amount I need out of my pension - I always have to take more (gross) to allow for HMRC to take extra and refund it a few months later?

HMRC don't deduct the tax, your pension payer does.

And they will deduct the tax according to your tax code and how far through the tax year we are. 

I still think you have a fundamental misunderstanding about what is actually happening here.  

Did you read @Linton's post?

Linton

There is also the question as to why the OPs tax codes dont add up to the tax allowance.

dunstonh

Thanks for this.  So HMRC will always take circa 40% and refund it, rather than take 20%? 

PAYE works by taking what you paid year to date and in that particular payroll run and assumes that average is what you are going to earn over the remainder of the tax year.

So, if you took a lump sum of £20,000 in April, at the start of the tax year, you would be taxed on the assumption that you are going to earn £20,000 a month for the rest of the tax year.   If you took it later in the year, then that amount would be averaged differently.  And as you get closer to the end of the tax year, it becomes closer to what it should be.

The P5x forms just speed up repayment or are useful where the person isnt taking a regular income for it to get paid back on.  HMRC, like many public sector roles, are suffering at the moment from people refusing to return to working in the office and are running far slower.    At this time in the year, with you getting monthly payroll payments, you may as well leave it and the tax will be refunded over the remaining months as the averaging effect winds down to payrun 12.

Where you drawdown from multiple pensions, then it gets messy.  This is one of the reasons people often consolidate them at retirement.   Multiple tax codes and mulitple pensions and multiple ad-hoc income payments become very difficult.

There is no way I can take just the amount I need out of my pension - I always have to take more (gross) to allow for HMRC to take extra and refund it a few months later?

We use a calculator to work out the tax.   I am assuming you don't use an adviser.  Some providers will ask if you are after the net figure or the gross figure.  If you say net, they will increase the gross amount to give you the net figure.   

Pat38493

Linton said:

There is also the question as to why the OPs tax codes dont add up to the tax allowance.

OP - maybe ask HMRC why you have a T tax code on your SIPP?

T means "other factors were put into this calculation".  It may be that your tax codes are not optimized for the two pensions you are taking.

Also I'm a bit dubious about Aegon's statement that the they give the gross amount and "HRMC tells them how much tax to deduct" as if there is a two way communication flow each month - I don't think it works like that - I think it's a logic process based on the definition of the tax codes.

Based on the pension numbers you quoted, I would suggest that you should have an R code on your L&G pension and an L code on your SIPP, given that your small L&G pension is never going to use up your full personal allowance, but you are always pulling out total spending above the personal allowance.   

This would then mean that your L&G pension you will always pay 20% on everything, but your SIPP tax should better vary with whatever you are actually pulling out even if it's variable.

This will probably improve your situation although it won't guarantee that you don't overpay if you make large one off withdrawals.

(I have to admit I'm not the expert on tax codes so the above might not be allowed but it makes sense to me based on the situation you describe).

All this assumes you don't have any other income like state pension.

Pat38493

dunstonh said:

Thanks for this.  So HMRC will always take circa 40% and refund it, rather than take 20%? 

PAYE works by taking what you paid year to date and in that particular payroll run and assumes that average is what you are going to earn over the remainder of the tax year.

OK but Dunstoh it's not totally that simple because the letters in the tax code may trigger different behaviors by the pension provider processing system?  Also this still wouldn't explain why a small lump sum taken much earlier in the year would have had nearly 40% tax taken off despite that even if this had continued through the year, it would not have resulted in 40% tax for the entire additional amounts.  Is it normal that with multiple pensions some of them have a "T" tax code?

MissBojangles

Pat38493 said:

Linton said:

There is also the question as to why the OPs tax codes dont add up to the tax allowance.

OP - maybe ask HMRC why you have a T tax code on your SIPP?

T means "other factors were put into this calculation".  It may be that your tax codes are not optimized for the two pensions you are taking.

Also I'm a bit dubious about Aegon's statement that the they give the gross amount and "HRMC tells them how much tax to deduct" as if there is a two way communication flow each month - I don't think it works like that - I think it's a logic process based on the definition of the tax codes.

Based on the pension numbers you quoted, I would suggest that you should have an R code on your L&G pension and an L code on your SIPP, given that your small L&G pension is never going to use up your full personal allowance, but you are always pulling out total spending above the personal allowance.   

This would then mean that your L&G pension you will always pay 20% on everything, but your SIPP tax should better vary with whatever you are actually pulling out even if it's variable.

This will probably improve your situation although it won't guarantee that you don't overpay if you make large one off withdrawals.

(I have to admit I'm not the expert on tax codes so the above might not be allowed but it makes sense to me based on the situation you describe).

All this assumes you don't have any other income like state pension.

I have a T tax code on my SIPP because HMRC assumed it was my primary income.  I have a £2240 income and a £16k income and they've put 'L' on the smaller one and 'T' on the regular larger one.  They have suggested requesting these to be swapped around in the new tax year.

I have no other income.  I am 56.

Dazed_and_C0nfused

OP - maybe ask HMRC why you have a T tax code on your SIPP?

T means "other factors were put into this calculation". It may be that your tax codes are not optimized for the two pensions you are taking.

A T code is always used when tax code allowances are given to a subsidiary/second source of PAYE income, nothing unusual at all with that.