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

Dazed_and_C0nfused

MissBojangles said:

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.

Have you checked your Personal Tax Account to see what the pension payer has reported to HMRC?

Pat38493

Dazed_and_C0nfused said:

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.

OK - but it seems like HMRC agrees that they should be the other way around - it doesn't make sense to have the L tax code on the £2240 pension in the OP's case - the L tax code should at least be on something that uses the full personal allowance each year and will also deal better with variable amounts.  Not that this will solve the immediate problem but it might alleviate it in the future.

badmemory

You should definitely look at your tax account & see if you can tell what they have done with the other £1500 of your personal allowance.

Pat38493

@MissBojangles On the first withdrawal that you made were you charged 40% tax or something less.  Your numbers indicated you were charged about 35% tax on the first irregular withdrawal and 38% tax on the second one.  Is this correct or have you not given the full exact numbers?

As someone else suggested above, the payroll software used for these kind of payments doesn't tend to deal well with combinations of regular income and one off payments.  The system probably when it saw your first 7000 withdrawal said congratulations Bojangles on your promotion we are now assuming that your monthly income is £8300 (normal withdrawal plus the 7K) - it would have then assumed you would earn £8300 from November to March which would mean you would have at least some level of 40% tax.  This is not unique to Aegon - most payroll systems I am aware of do something like this.

Did you notice any change in tax on your December payment?  Often when the payroll system sees that the income went back down again it starts to adjust again, but this depends partly on the tax code used.

It would be a similar case with the £13K withdrawal which came only 2 months later.  The systems are even worse at dealing with this type of scenario nearer to tax year end.

Based on this I would suggest that you fill in a tax return at the end of this tax year to make sure you are sorted, especially since as two other posters pointed out, the numbers in your tax codes don't even add up to your personal allowance.  Therefore unless there is some other valid deduction to your personal allowance you might be paying a little too much tax anyway even not taking into account the lump sum withdrawals.

I would also stick to the opinion that your tax code letters are the wrong way round and your L code should be on your SIPP, especially given you have many years to go until the complication of state pension.

One other point - at the risk of stating the obvious, I suspect that what many pensioners do once they realise these kind of complexities is to adjust their regular SIPP withdrawal accordingly - so if you know that you are due a tax refund, you can reduce your regular SIPP income in the following year accordingly.

As an aside - I've always wondered why payroll systems don't have a better way of allowing the admin to indicate that items are a single payment like a bonus or lump sum rather than a part of the regular income... it doesn't feel like rocket science. 

zagfles

MissBojangles said:

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?

There's lots of irrelevant waffle in this thread. Suggest you check your tax code for the SIPP again, has it got an X or M1 at the end? Or is there a "Month 1" indicator set?

I think it must do - that's all that makes any sense. Assuming it does then you're on a non cumulative tax code and that's the reason why you're getting so massively taxed.

You need to get HMRC to put you on a cumulative tax code - then you might still get a bit overtaxed, but nowhere near as much particularly for withdrawals late in the tax year, and you'll get it back in later months anyway.

HMRC PAYE calculator here: http://payecalculator.hmrc.gov.uk/PAYE0.aspx

badmemory

I agree with zagfles there must be an X or M1 in your code.  I thought I had misunderstood something but that is the only thing which would account for it not being self correcting.  You do need to check your account with HMRC & see what they say & then compare it with your providers account & make sure they do actually agree.  It is not unheard of for a company to use an incorrect code despite what they receive from HMRC & it is also not unheard of for HMRC to send info which is difficult for the company to tie up to a client.

Pat38493

badmemory said:

I agree with zagfles there must be an X or M1 in your code.  I thought I had misunderstood something but that is the only thing which would account for it not being self correcting.  You do need to check your account with HMRC & see what they say & then compare it with your providers account & make sure they do actually agree.  It is not unheard of for a company to use an incorrect code despite what they receive from HMRC & it is also not unheard of for HMRC to send info which is difficult for the company to tie up to a client.

OP quoted their tax codes in their second post on the first page but no harm in checking again I guess.  There was no M1 or W1 or X.  In second post OP clarified 2 pensions - one has an L tax code and one a T tax code.  According to HMRC website T means "HMRC needs to review some items with employee".

Also fixing the tax codes won't help the OP in current tax year as too much tax has already been deducted and even if charged zero by PAYE in Feb and March HMRC will still owe money back to OP.  This is probably the reason why HMRC said they can't fix it in the current year.

Also OP has not told us what tax was charged in December so we don't know for sure that the system didn't attempt to start correcting something.

Linton

badmemory said:

I agree with zagfles there must be an X or M1 in your code.  I thought I had misunderstood something but that is the only thing which would account for it not being self correcting.  You do need to check your account with HMRC & see what they say & then compare it with your providers account & make sure they do actually agree.  It is not unheard of for a company to use an incorrect code despite what they receive from HMRC & it is also not unheard of for HMRC to send info which is difficult for the company to tie up to a client.

I agree that is the effect the OP is seeing.  But I am not certain whether the cause is necessarily due to a non-cumulative tax code.  For example are the lump sums being taken under a different tax code. 

That is why, intil the OP can let us have the details from the tax account I dont think we can diagnose any further.

zagfles

Linton said:

badmemory said:

I agree with zagfles there must be an X or M1 in your code.  I thought I had misunderstood something but that is the only thing which would account for it not being self correcting.  You do need to check your account with HMRC & see what they say & then compare it with your providers account & make sure they do actually agree.  It is not unheard of for a company to use an incorrect code despite what they receive from HMRC & it is also not unheard of for HMRC to send info which is difficult for the company to tie up to a client.

I agree that is the effect the OP is seeing.  But I am not certain whether the cause is necessarily due to a non-cumulative tax code.  For example are the lump sums being taken under a different tax code. 

That is why, intil the OP can let us have the details from the tax account I dont think we can diagnose any further.

Why would a SIPP provider use a different tax code for a changed payment?

What OP posted matches exactly with having a non cumulative tax code.

zagfles

Pat38493 said:

badmemory said:

I agree with zagfles there must be an X or M1 in your code.  I thought I had misunderstood something but that is the only thing which would account for it not being self correcting.  You do need to check your account with HMRC & see what they say & then compare it with your providers account & make sure they do actually agree.  It is not unheard of for a company to use an incorrect code despite what they receive from HMRC & it is also not unheard of for HMRC to send info which is difficult for the company to tie up to a client.

OP quoted their tax codes in their second post on the first page but no harm in checking again I guess.  There was no M1 or W1 or X.  In second post OP clarified 2 pensions - one has an L tax code and one a T tax code.  According to HMRC website T means "HMRC needs to review some items with employee".

Also fixing the tax codes won't help the OP in current tax year as too much tax has already been deducted and even if charged zero by PAYE in Feb and March HMRC will still owe money back to OP.  This is probably the reason why HMRC said they can't fix it in the current year.

Also OP has not told us what tax was charged in December so we don't know for sure that the system didn't attempt to start correcting something.

Yes it will. Get a cumulative tax code in time for the last payday before the end of the tax year and refund will be paid in PAYE.