Simple SIPP question re 25% tax free 8 March at 2:17PM in Savings & investments 6 replies 169 views

JohnB47

Regarding a cash SIPP, if 25% of this is withdrawn as a tax free lump sum, I understand that this is taxed initially and the SIPP holder has to claim a tax refund using a P55 form.

So the question is, how is the tax applied initially - does the SIPP provider pay the 25% net of tax, or does the SIPP provider pay the whole 25% and HMRC somehow bill the SIPP holder?

Just wondering at what point the completion of the P55 tax claim form should be done.

Dazed_and_C0nfused

JohnB47 said:

Regarding a cash SIPP, if 25% of this is withdrawn as a tax free lump sum, I understand that this is taxed initially and the SIPP holder has to claim a tax refund using a P55 form.

So the question is, how is the tax applied initially - does the SIPP provider pay the 25% net of tax, or does the SIPP provider pay the whole 25% and HMRC somehow bill the SIPP holder?

Just wondering at what point the completion of the P55 tax claim form should be done.

A TFLS never has tax deducted.

Why do you think it does?

JohnB47

Dazed_and_C0nfused said:

JohnB47 said:

Regarding a cash SIPP, if 25% of this is withdrawn as a tax free lump sum, I understand that this is taxed initially and the SIPP holder has to claim a tax refund using a P55 form.

So the question is, how is the tax applied initially - does the SIPP provider pay the 25% net of tax, or does the SIPP provider pay the whole 25% and HMRC somehow bill the SIPP holder?

Just wondering at what point the completion of the P55 tax claim form should be done.

A TFLS never has tax deducted.

Why do you think it does?

Wow. Quick reply.

Well, I picked up the idea from various sources, that HMRC treats a 25% TFLS, initially, as the first payment for a new employment and somehow taxes it accordingly. That's why the completion of a P55 form is necessary - to claim the tax back.

Surely that's correct?

Albermarle

JohnB47 said:

Regarding a cash SIPP, if 25% of this is withdrawn as a tax free lump sum, I understand that this is taxed initially and the SIPP holder has to claim a tax refund using a P55 form.

So the question is, how is the tax applied initially - does the SIPP provider pay the 25% net of tax, or does the SIPP provider pay the whole 25% and HMRC somehow bill the SIPP holder?

Just wondering at what point the completion of the P55 tax claim form should be done.

Even HMRC will not tax a tax free amount !

Probably what you are getting confused about, is that when you take any of the remaining taxable amount, you may get overtaxed to begin with and have to claim some back, depending on your overall tax/income situation.

JohnB47

OK, I must be confused then.

I was sure that the 25% tax free lump sum would have been taxed and the tax would need to be reclaimed. I even remember reading something about it how the HMRC system was antiquated and the lump sum was treated as the first months payment for a new employment.

Ah well, so the TFLS is totally free of tax when it's withdrawn. And if the monthly drawdown is calculated to be low enough to avoid income tax, the taxman should never make an incorrect assumption.

Thanks.

Albermarle

I even remember reading something about it how the HMRC system was antiquated and the lump sum was treated as the first months payment for a new employment.

The problem is if you take a one off taxable lump sum, earlier in the tax year. The HMRC system assumes that you will get that amount every month and taxes you accordingly. It is not really antiquated it is just the way it works as it is no idea of your future intentions, so has to make an assumption, until informed otherwise. It is not possible to pre empt the situation, as until the first payment is made there is no record on their system of a new taxable income stream.

JohnB47

Albermarle said:

I even remember reading something about it how the HMRC system was antiquated and the lump sum was treated as the first months payment for a new employment.

The problem is if you take a one off taxable lump sum, earlier in the tax year. The HMRC system assumes that you will get that amount every month and taxes you accordingly. It is not really antiquated it is just the way it works as it is no idea of your future intentions, so has to make an assumption, until informed otherwise. It is not possible to pre empt the situation, as until the first payment is made there is no record on their system of a new taxable income stream.

Yes, that's where I got confused. Thanks.