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

Pat38493

Lagrange said:

Linton has clearly explained how cumulative and non-cumulative tax codes work. I calculate that the opening poster has been taxed on a non-cumulative tax code (also known as a month 1/week 1 code). This means that she has paid income tax incorrectly at 40%.   

HMRC have either issued this tax code incorrectly or the pension provider has applied it as a non-cumulative code when it should not have been.  I suggest that HMRC is contacted again and a cumulative tax code is requested for the rest of the tax year.

Month 1 codes are usually used when HMRC do not know the income details e.g. a change of employment and final income details are not know from the previous employment. In this case the tax office should be aware of income information.

HMRC should also be asked about the missing tax allowances for the year as mentioned by a previous poster unless it relates to a known deduction e.g. underpayment for a previous year.

My rough calculations from the information provided are as follows:

	Nov 22	Income Tax	Jan 23	Income Tax
Monthly income	1333		1333
Drawn	7000		13000
Total for month	8333		14333
Personal allowance	-735		-735
Taxable total	7598		13598
At 20 %	3142	628.40	3142	628.40
At 40 %	4456	1782.40	10456	4182.40
Total tax		2410.80		4810.80

 

The personal allowance of £735 is the calculated from the tax code of 882 by adding 9 to the tax code and dividing by twelve.

The amount taxable at 20% is calculated by taking the basic rate band of £37,700 and dividing by 12.

 

 

Thanks Linton and Lagrange.

The remaining questions then are - 

- Is the 882 tax code actually correct given that the OP did not report any other sources of income or adjustments?  Shouldn't it be 1033T as the other pension is £2240/year?

In fact, going further, wouldn't the best way to manage the OP's pensions based on information provided so far be:
SIPP tax code - 1257L
DB tax code - 0T

However, it might not be a good idea to implement this exact solution right now because this will result in DB pension trying to charge more tax than the remaining fixed income available?  (maybe this is the solution HMRC want to do and they know it will result in OP potentially slightly underpaying in 22/23)

Therefore to fix it in the current year, they should apply 1033T (cumulative) to the Aegon system (or 1033L as it actually won't make a difference in this case).  However I guess HMRC would have to instruct them to do this.

Aegon should also remove any non cumulative flag on OP's pension settings.

Of course, unfortunately with all the details about tax codes, nobody ever proposed a solution to the OP's original problem which was - I need money for my car right now today!  I don't think there is a solution to that other than using any existing savings, using a credit card or overdraft and requesting another withdrawal quickly.

zagfles

Lagrange said:

Linton has clearly explained how cumulative and non-cumulative tax codes work. I calculate that the opening poster has been taxed on a non-cumulative tax code (also known as a month 1/week 1 code). This means that she has paid income tax incorrectly at 40%.   

HMRC have either issued this tax code incorrectly or the pension provider has applied it as a non-cumulative code when it should not have been.  I suggest that HMRC is contacted again and a cumulative tax code is requested for the rest of the tax year.

Month 1 codes are usually used when HMRC do not know the income details e.g. a change of employment and final income details are not know from the previous employment. In this case the tax office should be aware of income information.

HMRC should also be asked about the missing tax allowances for the year as mentioned by a previous poster unless it relates to a known deduction e.g. underpayment for a previous year.

My rough calculations from the information provided are as follows:

	Nov 22	Income Tax	Jan 23	Income Tax
Monthly income	1333		1333
Drawn	7000		13000
Total for month	8333		14333
Personal allowance	-735		-735
Taxable total	7598		13598
At 20 %	3142	628.40	3142	628.40
At 40 %	4456	1782.40	10456	4182.40
Total tax		2410.80		4810.80

 

The personal allowance of £735 is the calculated from the tax code of 882 by adding 9 to the tax code and dividing by twelve.

The amount taxable at 20% is calculated by taking the basic rate band of £37,700 and dividing by 12.

 

In fact it's a bit more tax in the second month as some will enter the 45% tax band  About £55 more. 

Lagrange

zagfles said:

Lagrange said:

Linton has clearly explained how cumulative and non-cumulative tax codes work. I calculate that the opening poster has been taxed on a non-cumulative tax code (also known as a month 1/week 1 code). This means that she has paid income tax incorrectly at 40%.   

HMRC have either issued this tax code incorrectly or the pension provider has applied it as a non-cumulative code when it should not have been.  I suggest that HMRC is contacted again and a cumulative tax code is requested for the rest of the tax year.

Month 1 codes are usually used when HMRC do not know the income details e.g. a change of employment and final income details are not know from the previous employment. In this case the tax office should be aware of income information.

HMRC should also be asked about the missing tax allowances for the year as mentioned by a previous poster unless it relates to a known deduction e.g. underpayment for a previous year.

My rough calculations from the information provided are as follows:

	Nov 22	Income Tax	Jan 23	Income Tax
Monthly income	1333		1333
Drawn	7000		13000
Total for month	8333		14333
Personal allowance	-735		-735
Taxable total	7598		13598
At 20 %	312	628.40	3142	628.40
At 40 %	4456	1782.40	10456	4182.40
Total tax		2410.80		4810.80

 

The personal allowance of £735 is the calculated from the tax code of 882 by adding 9 to the tax code and dividing by twelve.

The amount taxable at 20% is calculated by taking the basic rate band of £37,700 and dividing by 12.

 

In fact it's a bit more tax in the second month as some will enter the 45% tax band  About £55 more. 

I agree that some will enter the 45% tax band. In fact it may even be more than £55 as there would be a loss of personal allowance with the  notional annual income being over £100,000 !  

Dazed_and_C0nfused

Lagrange said:

zagfles said:

Lagrange said:

Linton has clearly explained how cumulative and non-cumulative tax codes work. I calculate that the opening poster has been taxed on a non-cumulative tax code (also known as a month 1/week 1 code). This means that she has paid income tax incorrectly at 40%.   

HMRC have either issued this tax code incorrectly or the pension provider has applied it as a non-cumulative code when it should not have been.  I suggest that HMRC is contacted again and a cumulative tax code is requested for the rest of the tax year.

Month 1 codes are usually used when HMRC do not know the income details e.g. a change of employment and final income details are not know from the previous employment. In this case the tax office should be aware of income information.

HMRC should also be asked about the missing tax allowances for the year as mentioned by a previous poster unless it relates to a known deduction e.g. underpayment for a previous year.

My rough calculations from the information provided are as follows:

	Nov 22	Income Tax	Jan 23	Income Tax
Monthly income	1333		1333
Drawn	7000		13000
Total for month	8333		14333
Personal allowance	-735		-735
Taxable total	7598		13598
At 20 %	312	628.40	3142	628.40
At 40 %	4456	1782.40	10456	4182.40
Total tax		2410.80		4810.80

 

The personal allowance of £735 is the calculated from the tax code of 882 by adding 9 to the tax code and dividing by twelve.

The amount taxable at 20% is calculated by taking the basic rate band of £37,700 and dividing by 12.

 

In fact it's a bit more tax in the second month as some will enter the 45% tax band  About £55 more. 

I agree that some will enter the 45% tax band. In fact it may even be more than £55 as there would be a loss of personal allowance with the  notional annual income being over £100,000 !  

There can't be a loss of Personal Allowance in this situation.  The pension payer simply operates the tax code they have and applies the tax free allowances based on that code followed by the 20/40/45% tax rates applicable.

Lagrange

The OP should contact HMRC as soon as possible to get her tax code changed. It may be possible for a refund to be paid with her monthly SIPP payments by March 2023. As mentioned above Aegon should only use the tax code as issued by HMRC. It has no discretion in this matter. 

The OP's  initial calculations were correct but unfortunately the wrong tax code was issued and/or implemented. She needs to ensure that in future a month1 code is not applied to any additional amount taken.  

 A zero tax code should not be used against any income source as this will mean that income tax will be deducted even if none is due in total for the tax year.  

Pat38493

Lagrange said:

The OP should contact HMRC as soon as possible to get her tax code changed. It may be possible for a refund to be paid with her monthly SIPP payments by March 2023. As mentioned above Aegon should only use the tax code as issued by HMRC. It has no discretion in this matter. 

The OP's  initial calculations were correct but unfortunately the wrong tax code was issued and/or implemented. She needs to ensure that in future a month1 code is not applied to any additional amount taken.  

 A zero tax code should not be used against any income source as this will mean that income tax will be deducted even if none is due in total for the tax year.  

OK well I'm not the expert but if you always use numbers in the tax codes for the 2 sources of income, doesn't that mean that both tax codes has to be separately adjusted by both providers each year - 2 potential points of failure?  My thinking was that in the particular situation the OP is in, as long as they are planning to always withdraw more than the personal allowance each year from their SIPP, they would only need one tax code to be adjusted each year and the other one could stay the same for a few years.  However I'm clearly not the expert there.

squirrelpie

The other tax code would be BR rather than 0. i.e. Basic Rate tax should be taken from it. As long as nothing was at a higher rate of course.

Dazed_and_C0nfused

squirrelpie said:

The other tax code would be BR rather than 0. i.e. Basic Rate tax should be taken from it. As long as nothing was at a higher rate of course.

If there was higher rate tax due overall but not at one individual source of income i.e. a job paying £30k and a pension of £25k then BR would still be the correct tax code for one and the other would include an adjustment (deduction) to account for the fact that higher rate tax was due but not at either source on their own.

Lagrange

There can't be a loss of Personal Allowance in this situation.  The pension payer simply operates the tax code they have and applies the tax free allowances based on that code followed by the 20/40/45% tax rates applicable.

My mistake. The PAYE system cannot cope with annual income over £100k. I understand this is one reason why everybody with income over this level need  to complete a tax return. 

Dazed_and_C0nfused

Lagrange said:

There can't be a loss of Personal Allowance in this situation.  The pension payer simply operates the tax code they have and applies the tax free allowances based on that code followed by the 20/40/45% tax rates applicable.

My mistake. The PAYE system cannot cope with annual income over £100k. I understand this is one reason why everybody with income over this level need  to complete a tax return. 

Although HMRC require a Self Assessment return in these cases PAYE can cope with income over £100k

But it's not an employer/pension payers job to alter tax codes each time a payment is made.  They simply operate the tax code they have and deduct the appropriate amount of tax.

If the tax code was calculated using an estimate of say adjusted net income of £95k and a salary or pension payment took adjusted net income over £100k it isn't the employer/pension providers job to recalculate the tax code.

The taxpayer could do that through their Personal Tax Account or HMRC would do it if the tax code was reviewed but it's not something the employer/pension payer gets involved in.